Flash Fixed Income Report /
Kazakhstan

Nostrum Oil: Here comes debt restructuring

  • The company plans to approach bondholders to initiate debt restructuring negotiations

  • Time is running out as remaining cash will only cover next coupon payment in Q3 20

  • A successful restructuring will need third party feed for GTU3 and/higher oil prices; reiterate Sell

Tellimer Research
31 March 2020
Published byTellimer Research

Reiterate SellNostrum Oil released an operating update focusing on three key messages: 1) a massive downgrade of reserves, 2) the termination of a formal sales process, and 3) debt restructuring. With oil price below Nostrum's operating breakeven level (according to our estimates), the absence of third party gas processing contracts and failed efforts to monetise existing assets through the formal sales process, the company has little to offer bondholders. We reiterate our Sell recommendations on the US$725mn notes due 2022 and the US$400mn notes due 2025.

2P reserves down 66% yoy to 138mmboe. New reserves estimate includes 43mmboe of proved producing reserves (those with the highest probability of being extracted to the surface). At the current rate of production (23,000boepd in March), the company could run out of proved producing reserves in five years. There's 81mmboe of probable undeveloped reserves, but they require substantial investments (drilling new wells) before they can be turned into production. At the current level of oil prices, Nostrum cannot afford drilling and is on cash preservation. We estimate that with Brent at US$23/bbl, Nostrum might be burning cash at a rate of US$1mn a month before capex, while still experiencing a rapid decline in production. 

Low oil prices bring restructuring forward. As we explained in our previous report, falling oil prices would bring Nostrum to the table to negotiate debt restructuring, and today’s press release confirmed our view. With substantially lower reserves, a restructuring proposal must include a significant haircut to its US$1,125mn debt. At prevailing oil prices, Nostrum’s oil and gas production is operationally loss-making. A positive outcome for the bondholders (and by “positive” we mean a recovery of at least 25-30 cents on the dollar) will depend on Nostrum’s ability to secure third-party gas processing volumes. Without it the company will quickly run out of cash (US$65mn) after paying US$43mn interest on both bonds in Q3 20. Alternatively, oil prices have to at least double so that Nostrum could generate positive operating cash flows that is sufficient to manage the speed of production decline and pay interest on the restructured debt. 

See our report Nostrum Oil: Restructuring countdown begins, where we look at Nostrum's financial performance under different oil price assumptions, including at US$25/bbl.