Mysterious rally. We have noticed a two-fold increase in the Nostrum Oil equity price since 11 October, accompanied by uncharacteristically high trading volumes, according to Bloomberg. NOGLN 22s and 25s have also seen buying interest, with bond prices recovering from their all-time lows of 45-46 to the 49 area. There have been no developments in fundamentals that could have caused the shift in investor sentiment. However, given the ongoing strategic review that could change the shape of Nostrum’s business and, potentially, enable it to focus on production growth, we cannot ignore price moves of such scale. We therefore change our recommendation on the NOGLN 22s and 25s to Hold.
Next trigger 1: Schlumberger and PM Lucas studies. Nostrum had been expected to receive the Schlumberger and PM Lucas reports in Q3 . Investors have long been concerned about the reliability of Nostrum’s reserves data, after several wells in the main producing area experienced an unexpected water inflow and had to be shut down, taking a toll on 2017-18 production. This prompted the company to review its geological models and commission the studies. If the latter confirm that Nostrum can efficiently develop existing 2P reserves, a big element of uncertainty would be removed. It could also help define strategic review options and attract buyers and strategic or financial partners, and lay the foundation for debt a restructuring or reprofiling.
Next trigger 2: Outcome of the strategic review. In June, the company notified the market that it was considering several options, including acquisitions, partnerships, farm-outs and any other corporate transaction to help it increase production and maximise shareholder value. The main problem for the business, as we see it, is a lack of funds to develop hydrocarbon reserves and load the state-of-the-art gas processing facility (GTU3) – assuming there are sufficient reserves to be developed. This question would be answered when the findings of the Schlumberger and PM Lucas studies are released. More certainty about reserve and production could pave the way for substantive discussions about strategic transactions with potential interested parties.
Capital injection and debt restructuring are needed. We reiterate our view that Nostrum could need both a capital injection (or a cash-rich strategic partner) and a debt restructuring to monetise its reserves and processing capability.