Due to the disappointing results of 1H2016, in particular, a revenue decrease by 40% (yoy) and obtaining loss on derivative financial instruments in 1H2016, we expect weak operational and financial results for 2016. We lower our 12М target price to GBp 315/GDR. At the same time, we believe that the company can increase production in line with the plan, up to 50 kboepd (+ 30%) in 2017. Considering the consensus forecast for oil prices of 50/barrel in 2017, we expect an improvement of operating and financial results of the Company, and therefore we maintain our “Hold” recommendation.
1H2016 financial results. Revenue decreased by 40% yoy to $163.4 mn, mainly due to the fall in the average price of Brent by 31% yoy. The production volume decreased by 12% yoy, which also weighed on results. The decline in revenue was partially offset by a decrease of general and administrative expenses by 23%, the finance costs by 9% and the selling and transportation expenses by 32%. At the same time, the main negative factor became a loss on derivative financial instruments, which ratio to revenues was 25% (1.4% in 1H2015). As a result, the Company recognized a net loss of $55.8 mn against a profit of 1H2015 in the amount of $15.2 mn.
1H2016 operational update. Average daily production declined by 12.1% yoy to 38.9 kboepd. The Company confirmed production plans for the end of 2016 of 40 kboepd. Completion of the GTU-3 (gas treatment facility) is still planned for 2017. Future cash payments for GTU-3 to the end of 1H2016 totaled $ 181 million, of which $ 93 million are planned before the end of 2016 and $ 88 million are planned in 2017.
Hedging contract. Loss on derivative financial instruments of $40.7 mn put significant pressure on results. The Company recorded this loss as a result of oil price hedging under $49.16. However, the put option at the end of 1H2016 was not implemented. Excluding the loss on derivatives, the Company's net loss was $15.1 mn, 73% below the actual net loss of $55.8 mn. In our opinion, the nature of the loss on financial derivative instruments is insufficiently transparent. Consequently, we do not expect changes in the amount of loss on the hedging contract in the FY2016 results.
Low oil prices and current debt burden as a restraining factor. Total debt remains at $960 mn and net debt of approximately $845 mn. According to our forecasts, the ratio of net debt to EBITDA at the end of the current year will amount to 5,5x. The impact of low oil prices is more significant given relatively modest scale of production activities (production of 40 kboepd).
Decrease of 12M target price to 315 GBp/GDR. Based on the weak 1H2016 results due to low oil prices which influenced production growth and financial performance, we decrease our 12M target price to GBp315/GDR while maintaining our «Hold» recommendation.