Why Shares In Roxi Petroleum plc Dropped By 9% Today

Roxi Petroleum (LSE: RXP) released its full-year results today, which showed a surprise swing in pre-tax profits. The release of a $25 million impairment provision on its unproven oil and gas assets caused pre-tax profits in 2014 to rise to $20.1 million, from a loss of $9.0 million in 2013. The Kazakhstan-focused oil and gas company has also benefited from the sale of its Galaz assets, netting the company $23 million. The proceeds from the sale would mean that its 2015 development costs will be fully funded.

In 2014, Roxi has been relatively unaffected by the fall in the international oil price, as its production is required to be sold at domestic prices, and the domestic oil price has, until recently, been relatively stable. However, Roxi warned that the domestic oil price in Kazakhstan has since fallen from $45 per barrel to approximately $10 per barrel. On news of this, shares in Roxi Petroleum fell by 9% during morning trading.

Despite the collapse in the domestic oil price, the company remains committed to more than doubling its production target to 4,000 barrels of oil production per day (bopd). But, even if Roxi meets its ambitious production targets, the much lower domestic oil price would mean revenues and earnings would be substantially lower. This could also mean that Roxi could struggle to keep up with its investment needs beyond 2015, without further dilution to existing shareholders.

The February 2014 devaluation of the Kazakh Tenge against the US dollar did help things on the cost side. Most local costs, including wages, are paid in Tenge, whilst income from oil production is denominated in US dollars. It is likely that further devaluations in the Kazakh Tenge will be made in the coming future, and this would continue to have a favourable impact on Roxi’s profitability.

But the devaluations are small comfort, as they are not going to offset the impact of the collapse in the domestic oil price. Although there may be some recovery in the domestic oil price, in line with movements in the international oil price, any correction in its price is likely to be limited. Domestic oil prices are likely to remain much lower than the international prices because of the dislocations in the global oil market and weak export markets.

In the longer term, Roxi would benefit from higher export prices, once production ramps-up and the company acquires the necessary full production licenses. But, we are still some time away, and Roxi’s deep wells means that difficult drilling conditions could delay production growth further.

Roxi’s focus on a single country and its lack of oil exports means that it is heavily exposed to more volatile domestic oil prices. Unless the domestic oil price in Kazakhstan rebounds strongly, which is unlikely, shares in Roxi Petroleum could have much further to fall.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.