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Govt. Legislation Dampens Cub's Ukrainian Production Capacity

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   |    Thursday,May 14,2015

Cub Energy Inc. reported interim financial and operating results for the first quarter of 2015. All dollar amounts are expressed in United States Dollars. This update includes results from KUB-Gas LLC, which Cub has a 30% ownership interest, and Tysagaz LLC, Cub's 100% owned subsidiary.

Operational Highlights

• First quarter production in Ukraine continued to be below capacity due to the lingering effects of government legislation attempting to reserve a large share of the natural gas market for the state owned National Joint Stock Company Naftogaz and lack of reinvestment at KUB-Gas.
• Production averaged 1,644 boe/d (98% natural gas) for the three months ended March 31, 2015, representing an 11% decrease from 1,857 boe/d in the comparative 2014 quarter and a 22% decrease from the 2,112 boe/d production averaged for the three months ended December 31, 2014.
• Monthly average of 1,383 boe/d for March 2015 for a 43% decrease over the December 31, 2014 exit rate of 2,407 boe/d. The decrease in March was a result of recent government decrees that encouraged producers to temporarily constrain production due to government interference in supply.
• Achieved average natural gas price of $7.77/Mcf and condensate price of $39.83/bbl during the three months ended March 31, 2015 as compared to $8.63/Mcf and $78.19/bbl for the comparative 2014 period and $9.62/Mcf and $72.34/bbl for the three months ended December 31, 2014.
• In January 2015, the Company added the fourth, fifth and sixth sets of perforations to the RK-21 well (100% WI). The well responded favorably by displaying an immediate increase in flowing tubing pressure with a corresponding increase of production from a five-day average of 0.8 MMcf/d to over 2.6 MMcf/d for the subsequent five-day period. These perforations were added over a two-day period at small incremental cost.
• During the first and second quarters of 2015, the Company upgraded the separation and dehydration process at the RK facility (100% WI) in western Ukraine.
• Completion and testing operations are substantially finished on the M-22 well (30% WI) in Ukraine. The S13, S13a and S13b were all non-commercial despite initially appearing promising on logs. The S6 zone did build up pressure after perforating and produced gas at rates too small to measure. The well is being suspended, and will be added to a fracture stimulation campaign which may occur later in 2015. If successful, M-22 will qualify for the reduced royalty rate of 30.25% for its first two years of production.

Financial Highlights

• Netbacks of $11.64/boe or $1.92/Mcfe for the quarter ended March 31, 2015 as compared to netback of $30.28/Boe or $5.05/Mcfe for the comparative 2014 period when royalty rates were 28% versus the current 55%. In addition, netbacks were $21.47/Boe or $3.58/Mcfe for the quarter ended December 31, 2014 when the Company realized higher gas prices.
• Revenue from hydrocarbon sales for the three months ended March 31, 2015 was $1.8 million (2014 - $1.7 million).
• Revenue from hydrocarbon sales by KUB-Gas for the three months ended March 31, 2015 were $17.0 million (2014 - $23.4 million) of which the Company's 30% share was $5.1 million (2014 - $7.0 million).
• The total pro-rata revenue from hydrocarbon sales, a non-IFRS measure combining the Company's revenue and 30% of the allocated KUB-Gas revenue, totaled $6.9 million (2014 - $8.7 million) for the three months ended March 31, 2015.
• The Company received $1.3 million in dividends during the three months ended March 31, 2015 as compared to $1.0 million during the comparative period. Due to the National Bank of Ukraine resolution prohibiting cross-border dividends, it is unclear when dividends will resume. The Company continues to review alternatives for repatriating dividends.
• The Company's net income from its 30% equity investment in KUB-Gas for the three months ended March 31, 2015 was $0.1 million (2014 - $1.1 million) which was impacted by lower gas prices, increased royalty rates (from 28% to 55%) and foreign exchange losses.
• The net loss for the Company for the three months ended March 31, 2015 was $1.2 million or $0.00 per share (2014 - $0.9 million or $0.00 per share).
• Capital expenditures of $0.1 million (2014 - $1.1 million) for the three months ended March 31, 2015 and the pro-rata capital expenditures, a non-IFRS measure combining the Company's capital expenditures and 30% of the allocated KUB-Gas capital expenditures, totaled $0.5 million (2014 - $3.2 million) for the three months ended March 31, 2015.
• The Company has $3.0 million available on a $5.0 million unsecured line of credit with Pelicourt as at March 31, 2015. Pelicourt notified the Company that it is having liquidity issues as a result of the National Bank of Ukraine resolution prohibiting the payment of cross-border dividends and will not be able to provide any further funding under the line of credit in 2015.
• With the current cash resources and the uncertainty surrounding the Pelicourt line of credit, dividend restrictions, currency fluctuations, reliance on a single customer, and impact on carrying values, the Company may not have sufficient cash to continue the exploration and development activities. These matters raise significant doubt about the ability of the Company to continue as a going concern and meet its obligations as they become due.

Outlook

The Company is re-evaluating its future capital programs on its 100% owned and operated Tysagaz assets in light of the recent changes in royalty rates and the temporary cross-border dividend restriction. On March 3, 2015, the Ukraine Parliament passed laws, reinstating the reduced royalty rate of 30.25% for newly drilled wells (for two years), and extending the cross-border dividend freeze through June 3, 2015. If financing becomes available or government policy changes, the Company may perform several workovers at Tysagaz in late 2015. The Company needs to reinvest capital in its operations to sustain or increase current production levels.

KUB-Gas is considering several fracture stimulations later in 2015 but will be dependent on government policy changes and discussions and approval of the partners.

The limit price for May at which gas can be sold to industrial customers is 6,810 Ukrainian Hryvnya per thousand cubic metres ("Mcm"). At the current exchange rate of 20.5 UAH/USD, that is equivalent to $9.35/Mcf. The price that the Company receives has been up to 20% lower, reflecting the margins of the traders through whom the gas is sold, and lingering effects of the government decrees.