Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    23 May 2019
    Published by

    In Focus: Nostrum Oil & Gas – Downgrading to Hold 

    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 exceeded its target level of US$100mn in May.

    Read the full report here

    Recap of the week’s key credit developments

    Zambia (ZAMBIN): Zambian US$ bonds fell this week after the government said it planned to seize mining assets from copper miner Vedanta Resources. ZAMBIN 2022s fell 2pts to 66.6 mid (as of today on Bloomberg), their lowest since February 2016, pushing yields to record highs of 19.5%. Meanwhile, the Finance Minister said that the government remained committed to the flexible exchange rate (which weakened to 14.07 per US$ last Friday, before recovering slightly this week) and did not plan to introduce capital controls. Separately, on Wednesday, the Bank of Zambia’s MPC hiked its policy rate by 50bps to 10.25%, citing upside risks to inflation stemming from the decline in the kwacha. In our view, investor sentiment towards Zambia keeps deteriorating given the authorities’ lack of policy action and fear that it is sleepwalking into a debt crisis. While real interest rates (policy rate minus latest inflation) have increased to 260bps with this latest move, experience of confidence crises in other countries suggests even more will need to be done to stabilise the currency and expectations.

    Nigeria (NGERIA): The National Bureau of Statistics (NBS) said on Monday that GDP growth had slowed to 2.01% yoy in Q1 19, from 2.38% in Q4 18. Real GDP growth in the oil sector declined by 2.4% yoy and crude production rose slightly to 1.96 mmbpd. Real GDP growth in the non-oil sector was 2.47%, lower than Q4 18, but higher than in Q1 18. The NBS noted that general elections held in Q1 may have contributed to the strongest first quarter performance since 2015, the inference being that fiscal slippage supported activity. The Q1 release was in line with our expectations. 

    Pakistan (PKSTAN): On Monday, the State Bank of Pakistan (SBP) increased its target rate for the seventh consecutive time, by 150bps to 12.25%. It is the first monetary policy decision since the IMF announced that it had reached Staff-Level Agreement on a 39-month, US$6bn Extended Fund Facility (EFF) on 12 May, and the first decision made under new Governor Reza Baqir. The MPC also noted two other key developments since the last policy decision: a wider fiscal deficit so far in FY 19, and a 5.93% depreciation of the rupee since the last MPC meeting, to PKR149.65 per US$ on Monday. The rate hike was not unexpected and the general consensus was c100bps.

    Turkey (TURKEY): On Tuesday, Turkish authorities resumed its repo auctions for the first time since 9 May. The suspension of one week auctions had removed cheap liquidity from lenders. After recent policy tightening to support the lira, Tuesday’s auction lowered effective interest rates by 150bps to 24%, and injected TRY17bn (US$2.8bn).  

    Mongolia (MONGOL, TDBM, TAVBOG, MGMTGE): In a week of seemingly negative headlines for Mongolian corporate issuance plans, Trade and Development Bank of Mongolia (TDBM) deferred its planned 3-year Reg S only US$-denominated eurobond. The new issue was deferred after a Mongolia court asked that the bank’s Chairman be detained. It is now not clear when (or if) this issuer will return and what the implications might be for the 2020 bond. This follows the cancellation of issuance plans late last week by the domestic conglomerate Tavan Bogd. Mongolia Mortgage Company successfully placed a debut US$300mn bond in January this year.

    Privatbank (PRBANK): The series of developments involving Privatbank in the last week include (a) the return of Igor Kolomoisky to Ukraine, (b) reassurances from the bank’s CFO that operations have not been significantly impacted by the plethora of court cases (though there has been an increase in withdrawals), (c) the NBU losing its appeal against a ruling that nationalisation was unlawful (see our report here), (d) a request to Privatbank from a Ukraine court to provide details of refinancing loans granted to the bank over a 17-year period, (e) victory for the NBU at Ukraine’s Supreme Court in a case against two companies affiliated with Igor Kolomoisky regarding repayment of indebtedness, and (f) a new court case filed in the US by Privatbank against Igor Kolomoisky alleging that loans were wrongfully used to acquire commercial real estate in various parts of the US. 

    Standard Bank Group (SBKSJ): Standard Bank has issued a US$400mn 10NC5 subordinated bond at par. This comes after FirstRand, Absa Group and Investec issued similar bonds last year (though the Investec issue is GBP-denominated). Strong demand suggests that increased participation in the eurobond market by South African lenders has been welcomed – according to Bloomberg, the final order book for the Standard Bank deal was in excess of US$2bn. 

    Eastern & Southern African Trade & Development Bank (PTABNK): The supranational has placed a new 5y US$-denominated bond at MS +279bps. PTABNK last issued a eurobond in 2017. This most-recent issue likely replaces the US$300mn security, which matured in December 2018. Other supranationals may follow – Afreximbank is scheduled to redeem a US$700mn bond in July. It is possible this may be replaced.

    Kuwait Energy (KUWAIE): Kuwait Energy’s US$250mn bonds are quickly approaching maturity, 80 days until redemption. The company’s tight liquidity has frequently come into the spotlight, raising questions about Kuwait Energy’s ability to pay. However, United Energy Group’s (UEG) recent acquisition of the company has removed concerns around the KUWAIE 19s repayment. Questions remain around the shape a refinancing deal could take, but, importantly, we expect it to be voluntary for KUWAIE 19s bondholders.