Investment Idea - JKX Oil & Gas (JKX)

JKX Oil & Gas

Ticker: JKX

Sector: Oil & gas producers

Listing: LSE

Introduction

JKX Oil & Gas produces oil and gas in Ukraine and Russia. It holds oil and gas exploration licences in Ukraine, Bulgaria, Hungary, Georgia and Slovakia (not both in all of them). 

Analysis

Production has increased slightly in 2009 and the firm has sizeable reserves in Ukraine and Russia as indicated in the preliminary results. Production facilities in Ukraine have been enhanced and the existing production facility is being overhauled, which will enable them to transport gas within Russia to other markets. The gas drilling test results in Russia and Bulgaria are promising and further tests are conducted to find whether the deposits are economically viable or not. Initial tests are still being conducted in Slovakia to find any potentially economically viable oil and gas deposits. In Georgia, the firm's partner Anadarko Petroleum Corporation discontinued exploration of oil and gas deposits after failing to find additional partners. Negotiations are taking place between the firm and the Georgian authorities to find an agreement on the exploration programme which would be financially attractive to both parties. After successful tests in Hungary, gas production has initiated. Further oil and gas exploration tests are being conducted after promising results at other deposits in the country. This upcoming financial year's objectives are:

1. Increase oil and gas production significantly.
2. Completely overhaul the existing gas production facility in Russia and restart production by Q4 2010.
3. Enhance and develop the exploration portfolio in Eastern Europe.
4. Conduct additional exploration tests 
5. Develop the Rudenkovskoye field.
6. Build a LPG facility in Ukraine.
7. Double gas reserves and production in Hungary.

The Chairman's and CEO's statements are optimistic suggesting that the above objectives will be achieved in during this financial year.

From looking at the latest results, I believe that the company can realise the full potential of it's assets in Ukraine,, Russia and Hungary. This could contribute in future earnings growth in the short to medium term. If the exploration tests in Bulgaria, Georgia and Slovakia are promising then these deposits may help the firm to diversify it production base in case of very unlikely political and economic problems that could emerge in some countries which it operates. This may also contribute to earning growth in the long term.

Financial ratios as of at the close of 22/4/2010:

All companies in the oil & gas producers sector:

Using the contrarian strategy, this stock fits in all of the criteria except the lowest two quintiles for P/BV and P/CF and dividend yield, which is below average. However, I am flexible since I use P/E as the core ratio. This is because: 

1. The stock's P/E, P/BV and P/CF are below sector averages making them cheaper than it's peers. 
2. Although the dividend yield is a little below average compared to it's peers, it has increased in the last four out of five years except for 2008, due to the worst recession in living memory. However, there number of companies which pay out dividends on LSE are very small.
3. With a dividend cover of 6.71, the company can definitely sustain and increase the dividend yield for a considerable future.
4. With a respectable current ratio of 2.39, it can still keep going after paying off all debts due within a year. The company is in good financial health.
5. Other ratios mentioned earlier are favourable, especially P/S below the sector average and the company is still growing, indicated by it's PEG of 0.87 and prospective PEG of 0.74. High ROCE indicates it has competitive advantage in exploring and developing oil and gas fields in the former Soviet Union and Warsaw Pact countries. This suggests that the firm has established itself in this niche market. Low borrowings and cash reserves are large enough to sustain ongoing operations and makes it easier for the firm to achieve growth.
6. Earnings growth is higher than that of the FTSE100 in the past year.
7. Forecasts indicate that the earnings are likely to increase in the near future. It is conservative compared to it's peers.

Conclusion

Based on all of the information I have researched, I believe that the stock is a very good buy if one wants to invest in the oil and gas producer sector.

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.


Full disclosure: None in JKX but intend to go long in the near future.