Nostrum Oil and Gas: Review of 9M2016 results

Increase of 12M TP to GBp 351/share, recommendation "SELL".

Altynay IbraimovaDecember 20, 2016

Since our last report on October 5, share price of Nostrum Oil and Gas (NOG, Nostrum) increased by 65%. The impressive growth in the value of shares in the absence of triggers allows us to consider a more optimistic scenario in the oil price forecast. Meanwhile, transition to cost saving drilling restrains our expectations about achieving minimum production levels planned by Company. Counting on the growth of oil price, we raise our target price to GBP351/share. However, on December 13 the NOG's shares updated yearly highs, closing at GBP467/share. Given the sharp and unjustified shares increase, we believe it is appropriate to take profits at current levels and therefore recommend to "SELL" Nostrum’s shares.

9М2016 financial results review. Due to the fall of the average price of oil by 16% (yoy) and a decrease in average daily production by 12% (yoy), Nostrum’s revenue for 9M2016 decreased by 35% (yoy) and amounted to $245m The Company halved its export sales, while revenues from sales in the domestic market increased by 2.8 times (yoy). Ratio of export sales and domestic sales was 70/30. Costs decreased by only 1% (yoy). In the same time the Company was able to significantly optimize other operating costs. However, the effect of the cost reduction was leveled by loss on derivative financial instruments ($47m). As a result, by the end of 9M2016 the Company recognized a net loss of $64m, which exceeds the 9M2015 loss by 3.5 times. Excluding the loss on derivatives, net loss was $14m. Average daily production for 9M2016 decreased over the year by 12% and amounted to 38.9 ths. bopd, mainly due to the transition to a more economical type of drilling. Current production capacity exceeds 44 ths bopd despite the fact that the projected level of production for the whole 2016 continues to be 40 ths. bopd. At the end of 9M2016 total liabilities of the Company amounted to $1 408m of which 67% are long-term loans and 24% deferred tax liabilities.

Production and prices estimates. Taking into account updated consensus forecast data by Bloomberg in our model we increase oil prices forecast for 2016-2020 period by an average of 15%. As a result, our target price is GBP351/share, which higher than the previous target price by 11%, but lower than the current price by 17%. Despite the increase in the forecast for oil prices, the profitability of the Company is still under the pressure of falling production volumes as a result of the transition to an inclined type of drilling. Based on current results, in 2017 we do not expect a significant improvement in financial performance, which, in our opinion, justified by the continuing low oil prices at which the Company will be costly to adhere to the planned completion of the GTU-3 and achieve the declared production levels. Recall that the Company planned completion of GTU-3 in 2016, but due to low oil prices and adjusting capital expenditures on drilling and construction of GTU-3, the completion of GTU-3 will not happen before 2017-2018.

Increase of 12M target price to 351 GBp/share, SELL recommendation. Given the adjusted Bloomberg consensus forecast for oil prices, which exceeds our expectations by an average of 15%, we raise our target price to GBP351/share. Taking into account the resent sharp increase in share price and retaining our expectations about the elusive Company plans, we recommend to "Sell" NOG shares. We also believe that credit risk will act as a deterrent: the Company has debt maturing in 2019 in the amount of $960m.

Please download PDF version of the report

Other reports