Nostrum Oil and Gas: 1H2017 results review

Decrease of the 12M TP to GBp502/share, “BUY” recommendation.

Altynay IbraimovaSeptember 08, 2017

Since our last review in May 2017, the consensus forecast for the oil price for 2017-2021 has declined by an average of 5%, bringing the corresponding changes to our model, due to which our target price has decreased to GBp502/share. Nevertheless, in our opinion, the Company's revenues, which showed comparable growth to Brent (+ 28% y / y), and the timely completion of the project UPG-3 may become triggers for the growth of the share price. We see clear signs of the timely completion of UPG-3 project, the delay of which we previously estimated as the main risk. The growth potential provided by the connection of GTU-3 justifies the increase in the forecasted production levels, and we raise our recommendation to "BUY". Moreover, due to a strong correction (-21%) since May, shares of NOG LN are now traded at a premium of 28% to our target price.

Oil price and production forecasts.

We updated the forecasts for the oil price, based on Bloomberg consensus forecast, which implies an average annual price increase of 4% to $65.5/bbl in 2021.

Production volumes were also revised. According to the press release of 1H2017, Nostrum announced about a change of the production volumes, in particular, about adjusting the plan for the average daily production in the current year from the previous 44ths boepd to 40-44ths boepd. According to the Company, the connection of GTU-3 to GTU-1 and GTU-2 will cause about three weeks of production downtime during 4Q2017. The Company is considering options to reduce this deadline. Nevertheless, we are reducing the level of production for the current year from the previous 44ths boepd to 42ths boepd.

For the following years, the Company's forecast remains unchanged: in 2018 - 50-80 ths boepd and in 2019 - 80-100 ths boepd.

Previously we used the lower limit of the expected production levels, which was justified by the risk of a later launch of the GTU-3 project. It should be recalled that the Company planned to complete the project by 2016 and postponing the timing was assessed by us as a risk. Today, the preparation for connection of UPG-3 and related announce confirm the Сompany's commitment to the completion schedule of the project until the end of 2017. In case of timely connection of GTU-3, we see the potential for increasing production in 2018-2019 and raise the forecast production levels to 65ths boepd in 2018 and 90ths boepd in 2019, which corresponds to the average expectations of the Company.

Nevertheless, our expectations for production volumes remain conservative. In our opinion, the previous unforeseen delays in the growth project can be repeated, which does not allow us to fundamentally rely on the Company's forecasts and lay the highest declared levels.

Decrease of 12M target price to GBp502/share, «Buy» recommendation.

Since our last recommendation the Nostrum’s share price has reached GBp531 at our target price of GBp539, corrected to GBp376. Our new target price, taking into account the updated figures, was GBp502/share and assumes a premium of 28%. Taking into account the high production potential of the Company, provided the GTU-3 growth project is successfully completed by the end of this year, we believe that investments in Nostrum shares at current levels are justified, and we recommend "Buy".

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