Nostrum Oil and Gas: 1Q2017 results review

Increase of the 12M TP to GBp539/share, “Hold” recommendation.

Altynay IbraimovaMay 26, 2017

1Q2017 financial results of Nostrum Oil and Gas failed to exceed market expectations with no additional surprises. The Company was able to show neutral results due to a relative stability of oil prices during the reporting period. Thus, the price of Brent oil rose by 55% over the year and, taking into account the improved prospects in the oil market, we revised our recommendation for Nostrum shares, by placing higher oil prices in the model in comparison with previous forecasts. Our target price amounted to GBp539/share and due to a current level of share prices (upside – 8%), we upgrade our recommendation from «Sell» to «Hold», noting the continuing risks of hedging losses and delays in completing the construction of UPG-3.

1Q2017 financial results review. Due to the growth of the average price of Brent oil from $35.2/bbl in 1Q2016 to $54.6/bbl in the reporting period, Nostrum's revenue increased 1.5 times (+51% yoy) to $112 mn. The Company increased both export sales (+63% yoy) and domestic sales (+30% yoy). In the meantime, the costs increased only by 8.7% to $50.3 mn, mainly due to depreciation. The gross profit margin was 55% compared to 37% a year earlier. Sales and transportation costs were reduced by 4% yoy due to lower transportation, handling and storage costs. According to Nostrum data, in 1Q2017 the connection to the KazTransOil pipeline was completed and starting next month the company expects even greater reduction in transportation costs. The loss on derivative instruments decreased by 95% qoq and did not exert significant pressure on the Company's 1Q results, which was observed during 2016. As a result, the Company received a profit of 1Q2017 in the amount of $13.6 mn against a loss a year earlier of $12.3 mn. Nostrum confirms plans to complete the project of UPG-3 in the current year. However, the Company does not fit into the previously announced budget of $500 mn, and increases costs to $532 mn.

Oil price and production forecasts. Average annual increase in oil price in 2017-2021 according to updated Bloomberg consensus forecast amounted to 5%. With this in mind, we changed the model, raising the average annual growth in oil prices forecast in 2016-2020 from 4% to 5%. The change in the price of oil, as the main trigger, has a significant effect on the target price, which increased to GBp539/share. Taking into account the Company's achievement of the declared production level in 2016 and the update of the planned levels, we revised the forecasts of the average daily production in the model. At the same time, we took into account that the Company's plans to complete the UPG-3 project in 2017 may be overstated, as we keep our opinion that the draft of UPG-3 carries the risks of delay and excess of expenditures. The increase in the project budget to $ 532mn confirms our assumptions. Due to the uncertainty regarding the timing of the completion of UPG-3, we are laying the lower boundary of the projected production range, which implies reaching an average daily production of 100 ths boepd in 2020. 

Increase of 12M target price to GBp 539/share, «Hold» recommendation. Given the adjusted Bloomberg consensus forecast of oil prices with an average annual growth by 5% to 2021 and the possibility of achieving higher production levels in the long term we increase our target price to GBp539 / share, and noting the continuing risks of hedging and untimely completion of UPG-3, we upgrade the recommendation to «Hold».

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