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JKX’s third quarter provides investors with an idea of what could lie in wait

As we wait for production results for 2009’s final quarter, JKX’s (LSE, JKX) third quarter provides investors with an idea of what could lie in wait. The company’s latest ramp up in output could not be better timed as the global economic recovery continues to gain traction and underpinned by a robust balance sheet, long term earnings look extremely secure. 

The company’s third quarter production report will take some beating. Not only did JKX post a 24% year on year output jump, the company reported a 30% hike in production from the Ukraine whilst announcing the commencement of production from the Hajdunanas field in Hungary.

Underpinned by Ukraine, oil production for the period increased 46% on a year ago to 5,233 barrels of oil per day. The increase came from new and worked over wells, and from successful development drilling.

Elsewhere, gas production for the quarter of 50.5 millions of cubic feet per day was a rise of 14% on a year ago. This was an important element because the gas price received rose 25% to US$7.44 per thousand cubic feet. The price of oil moved in the opposite direction and fell 38% to US$62.25 per barrel.

Targeted production for 2010 is 11,500 barrels of oil equivalent per day, with gas becoming increasingly important as oil reserves dwindle.  First gas is expected to flow from Russia, late in 2010.
Company CEO Dr Paul Davies has reported that the company is being presented with the largest number of opportunities in the company’s history.  Despite a reduction in the group’s cash balance, the group’s finances are robust enough to take advantage.

Indeed, the balance sheet is robust with no debt. That said, this could change.  Depending on the price of oil, free cash flow is tipped to turn negative in 2010 and debt will build.

Other sources for investor optimism include developments at the Koshekhablskoye gas field in the Russian Republic of Adygea. The first production test from Well-27 exceeded expectations with a flow of 13,000 thousand cubic feet per day, more than two times what was expected. This well will start contributing to cash flow in 4Q10 when production is scheduled to start. At the time, the announcement spiked the share price higher.

Meanwhile, the Gorbehaza-1 well within the Nyirseg licence in Hungary encountered two gas bearing zones.  Although the accumulation is small it emanated from the first hole in a 120 sq km licence. The well is tied into the Hajdunanas Gas Production Facility which is only 2.5km away. JKX holds a 50% interest in the Hajdunanas Field.

Overall, JKX’s stand out record of exploration and development will continue to underpin long term earnings.  The company’s sound financial base permits a dividend. For the last three years earnings per share have been fairly steady but the dividend returned to shareholders has jumped from US$4.5m in 2006, to US$13.6m for 2008.

Petroleum reserves at the end of 2008 stood at 78.8 million barrels of oil equivalent.  At the current share price this translates into a market capitalisation of US$8.97 per barrel.

Disclosure: The author holds no positions