Nostrum Oil and Gas: Operating results for 2017

Decrease of 12M TP to GBp345/share, recommendation Hold

Altynay IbraimovaFebruary 06, 2018

Contrary to our expectations, the Company was unable to reverse the trend of a periodic delays in the production schedule, therefore we decrease our EBITDA forecast in 2022 by 52% (compared to the previous forecast). In this regard we reduce our 12M target price by 31% to GBp345/share and change our recommendation from Buy to Hold. We note a rather conservative approach in the drilling of new wells due to the limited drilling capacity (2 units) and the oil price in the Company's budget ($50/bbl), which, in our opinion, will allow Nostrum to decrease capital expenditures and generate positive cash flows within the forecasted period. Also taking into account high sensitivity of share price to oil prices, a favorable price environment in the oil market during 2018-2022 could act as the driver of the share price growth.

Operating results for 2017 brought changes to our model, mainly due to reduced production forecasts. Decrease in the average daily production by 3% yoy in 2017 did not exert significant pressure on the share price, compared to a decrease in production forecasts. New production plans in 2018-2021 are inferior to the Company's most minimal forecasts made earlier. Taking into account the repeated failure to fulfill the planned production, we estimate the declared levels to be too high and expect a slight increase during 2018-2022 laying a smooth and uniform growth from 35kboepd in 2018 to 55kboepd in 2022.

Optimism in oil price forecasts in 2018-2021 partially compensates for the negative, caused by the backlog of production. Since the last report in September 2017, the situation on the oil market has improved significantly, bringing the corresponding changes in the forecasts for the next five years. Noting the high sensitivity of revenues to the price of oil, we believe that price growth will ensure the stability of cash flows and ease the servicing of debt refinanced to the next 7 years.

Decrease of 12M TP to GBp345/share, "Hold" recommendation. Our new target price decreased by 31% and amounted to GBp345/share. We downgrade our recommendation from Buy to Hold, noting the risks associated with the multiple delays in production schedules on the one hand, and the positive effect of debt refinancing, which allows the Company to keep the low cost of capital, on the other hand.

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