Nostrum lowered production forecasts

Altynay IbraimovaJanuary 30, 2018

Nostrum Oil and Gas announced operating results for 4Q2017. The average daily production in 4Q2017 was 34.3ths boepd and for the whole year - 39.2ths boepd.

Despite the fact that by the end of 2017 the Company expects revenues of over $400mn (for 2016 - $348mn), we draw attention to the Company's decline in production forecasts. Nostrum expects that the level of production this year will be "flat during the year" and will be approximately 37ths boepd (below our forecasts by 43%). Such a low production forecast, in our opinion, causes the loss of time (3 months) for the commissioning of two new production wells and 3 weeks of downtime for connecting UPG1 and 2 to UPG3 in 2Q2018.

Forecasts for subsequent 2019-2022 are also narrowed. In 2019, the Company expects a production level of 50 ths boepd (below our forecast of 44%), in 2020 – 65ths boepd (below our forecast of 38%) and in 2021 the company sees the prospects of increasing production to 100ths boepd (below our forecasts by 9%).

Table 1. Production forecasts

 

 

 

 

 

Ths boepd

2018F

2019F

2020F

2021F

2022F

Nostrum min - previous forecast

50

80

100

n/d

n/d

Nostrum max - previous forecast

80

100

100+

n/d

n/d

Halyk Finance

65

90

105

110

115

Nostrum - new forecast

37

50

65

100

n/d

Our view

The news is unambiguously negative for the value of the shares. The expected level of production for 2018-2021 is inferior to the Company's most minimal forecasts made earlier.

We are also skeptical about the company's plans to increase production from 65ths boepd in 2019 to 100 ths boepd by 2021 with an increase in the number of drilling rigs from 5 units to 6 units. Despite the strengthening of forecasts for oil prices in comparison with previously set expectations, the volumes expected by the Company do not justify our current target price. We put our recommendation for revision.