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Nostrum Oil: US$35/bbl brings debt restructuring forward

  • We estimate Nostrum's FCF-breakeven oil price at US$50-55/bbl in 2020

  • With Brent at US$35/bbl, Nostrum could run out of cash by Q4 20-Q1 21

  • We reiterate Sell on NOGLN 22s and 25s

Tellimer Research
9 March 2020
Published byTellimer Research

Nostrum has announced that gas deliveries from UOG will be delayed but are still expected to start before April 2023. 

To recap, in January, Nostrum released bearish 2020 production guidance of 20,000 barrels of oil equivalent per day (boepd) and focused on cash preservation and securing third-party gas supplies for its recently commissioned gas treatment unit, GTU-3. The only such contract is with UOG, which has yet to start gas deliveries. 

With little progress reported on the gas processing contracts, investors were left guessing about potential partners. Kashagan, the biggest offshore oil and gas field in Kazakhstan, was seen as one of such opportunity. However, according to recent news, the Kazakh government has decided to build its own 1bcm gas processing plant, rather than use Nostrum’s spare capacity (if, indeed, that had ever been considered).

In Q3 19, Nostrum had US$91mn cash. Even in a US$60 per barrel oil price environment, we expected that, without higher production and/or substantial third-party gas processing volumes, the company would gradually burn cash. However, according to our estimates, Nostrum had 12-18 months to come up with a refinancing or restructuring plan.

With Brent falling to US$35/b, the situation looks different. We estimate that, in 2020, Nostrum’s FCF-breakeven oil price will be in the range of US$50-55/b depending on capex, but not accounting for any positive effect of KZT depreciation, which historically goes hand-in hand with severe oil price shocks. With Brent at US$35/b, we expect Nostrum’s EBITDA/interest cover to fall below 0.5x.

If the oil price stays at US$35-40/b, we expect Nostrum to start using cash reserves to pay interest on the bonds. In Q4 20-Q1 21, the cash reserves could reach a point where they can no longer support operations. We reiterate our sell recommendation on the NOGLN 22s and 25s.

Quarterly cash balance forecast under different oil price assumptions

Source: Tellimer Research