Fixed Income Analysis /

Nostrum Oil: Downgrading to hold

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    22 May 2019
    Published by

    We downgrade the NOGLN 22s and 25s to hold as further growth requires stronger fundamental signals. Nostrum reported Q1 results on 21 May, which, after the publication of an operational update in April, did not add much new information. What was interesting is the conference call that followed. The main takeaway is that wells 41 and 42 reached their target depths, encountering three different hydrocarbon reservoirs. We think that is a positive development that reduces the downside risk to reserves and production, but is not enough to continue to justify a Buy recommendation, with the NOGLN 22s having rallied c11pts and the NOGLN 25s c8pts in price since March. A tangible change in the production outlook is needed for the bonds to advance from current levels. We downgrade NOGLN to hold and look forward to further updates on production guidance, the drilling programme and reserves on the back of the testing of wells 41 and 42.

    Wells 41 and 42 completed; hydrocarbons encountered. The wells will be tested until end-June, when management expects to obtain quantifiable reserves and potential production data. Meanwhile, the authorities have approved the 22-well-strong development plan for the north area of Chinarevskoye – the company expects its Chinarevskoye production licence to be amended to include the north reservoirs in three/four weeks. Management shared some ballpark estimates based on early observation of the new wells, suggesting the northern area could add 50mmboe-100mmboe to Nostrum’s reserves.

    The next triggers. The first is the operational update on 30 July. If the testing of wells 41 and 42 is completed on time, we would expect Nostrum to disclose further details of the 2019 drilling programme. The next key date is 20 August – the release of the H1 financial results. At this time, better visibility of the size and production potential of the northern area could lead to updated production guidance. Finally, in Q3, the technical review of the three producing reservoirs in the north-east will be completed. This and the appraisal of the north of the Chinarevskoye field will shape capex and production guidance for 2020, which might be shared alongside the Q3 operational and/or financials update in late October-mid November 2019.

    Further drilling likely to be focused in the north in 2019. The company maintained its full-year production guidance at 30,000boepd, and will provide further updates after it completes testing of wells 41 and 42. Management is inclined to continue appraisal and development of what has become a promising producing area of Chinarevskoye field. To recap, any producing well added this year will take Nostrum’s output above 30,000boepd as the guidance is based only on the wells that were producing at end-18 and incorporates natural decline rates.

    Q1 19 results. Nostrum produced 32.646boed in Q1, earned US$95mn (flat yoy) and recorded US$59mn EBITDA (+3% yoy). Net leverage rose to 4.6x from 4.4x (according to our calculations) due to a reduction in cash caused by a time mismatch in the shipment of hydrocarbons and the receipt of payment, as well as the coupon on the bonds falling on to Q1 and Q3. Management confirmed on the call that cash balance returned to and exceed its target level of US$100mn in May (Table 2).