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Kazakhstan

Nostrum Oil: The company is on sale

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    24 June 2019
    Published by

    Nostrum says it will consider bids from third parties who want to acquire the company, and is also open to other options including farm-outs of stakes in some assets.

    After Nostrum announced neutral Q1 19 results followed by a constructive conference call elaborating on the ongoing development of the Northern area of Chinarevskoye field, both equity and bond prices plummeted. A 15% (now 10%) slide in Brent has clearly played a role. However, we believe NOGLN 22s and NOGLN 25s are back to the levels where investors appear to be compensated for a wide range of outcomes, including NPV-negative restructurings.

    What could the sale of the company mean for the bondholders?

    • Early redemption – probably unlikely. The terms of NOGLN 22s and 25s include a change of control option. If a third party acquires all – or substantially all – of the property and assets of Nostrum Oil, the company could be required to redeem the outstanding bonds at 101. The definition of the change of control, therefore, could potentially allow for a variety of transactions in which less than 100% of Nostrum’s assets change hands without triggering the put option.
    • Credit enhancement from a new owner. If the successful bidder is a big and financially strong oil and gas company, NOGLN 22s and 25s could have significant upside, which may be realised in two or more steps – first upon the announcement of such an interest, then as the likelihood of the closure of such a transaction increases and/or after the closure, depending on the new owner’s (or majority shareholder's) degree of financial support for Nostrum.
    • No credit enhancement from a new owner. If the successful bidder is not an obviously stronger entity, the uncertainty over repayment (refinancing) of the bonds could continue to weigh on valuations.
    • Early refinancing/restructuring/reprofiling. With the strategic review of the business underway and steps towards a corporate transaction being taken, it is possible that Nostrum may consider a liability management transaction sooner rather than later. There are hardly any scenarios (including the most optimistic view of oil prices) in which the company could accumulate enough cash on its accounts to repay the NOGLN 22s at maturity. In the absence of cash injections allowing the company to increase gas production and load the state-of-the-art GTU3, NOGLN’s cash flows in 2021-22 will rely excessively on the oil price. Given the opportunity – which the emergence of a potential bidder may provide – a liability management transaction would make perfect sense, in our view.

    We believe that given current price levels, the potential upside for NOGLN 22s and 25s outweighs the potential downside. However, prevailing uncertainty is likely to contain bond prices despite Brent's recovery. We reiterate our Hold recommendation.