Nostrum Oil And Gas Announced 1h2017 Financial Results

Nostrum Oil Lifts Earnings But Lowers Annual Sales Guidance

According to the 1H2017 results Nostrum received a net profit of $13.5mn against the loss a year earlier. The Company’s revenue increased by 28.5% to U$210mn for the reporting period.

The Company’s revenue increased by 28.5% to U$210mn for the reporting period. This is mainly explained by the increase in the average Brent crude oil price from $41.0/bbl during the 1H2016 to $52.7/bbl during the reporting period. Cost of sales increased by 4.2% due to the higher royalties which are driven by higher oil prices, and higher payroll and related taxes and costs of materials and supplies. At the same time, the Company reduced general and administrative expenses (-5.4% yoy) and sales and transportation costs (-0.5% yoy), resulting in an increase of EBITDA of 19% to $ 120mn.

It is worth noting the absence of losses on derivatives during 1H2017, as well as receiving a gain from the exchange rate difference of $2.9mn (1.4% of revenue) against a loss in 1H2016 at $ 6.8mn (4.2% of revenue).

According to the 1H2017 results Nostrum received a net profit of $13.5mn against the loss a year earlier.

Fig. 1. Selected financials
$mn

1H2016

1H2017

yoy

Revenue

164

210

28%

Cost of sales

94

98

4%

EBITDA

101

120

19%

EBITDA, margin %

61.7%

57.0%

Net profit

-56

13

Net profitmargin %

-34.1%

6.4%

SourceCompany data

Nostrum’s net operating cash flow for the reporting period amounted to $118.5mn, showing an increase of one and a half times compared to the same period last year. At the same time, the Company increased costs of GTU-3, as well as drilling costs, and therefore net investment cash flows totaled $91.4mn ($ 99.2mn for 1H2016). Net cash flows from financial activities have developed at a positive level ($31.7mn), without showing any significant changes. The Company completed the reporting period with cash in the amount of $97.5mn (-3.5% from the beginning of the year). Net debt at the end of 1H2017 is $ 864.3mn (+ 0.7% from the beginning of the year).

Nostrum revised the production schedule, reducing the level of average daily production in the current year from the previous 44ths bopd to 40-44ths boepd, due to possible downtime in production during 4Q2017 due to the connection of GTU-3 to GTU-1 and GTU-2. The Company evaluates the downtime in three weeks and considers options for reducing this period.

For the following years, the production forecast remains unchanged: in 2018 – 50-80ths boepd and in 2019 – 80-100ths boepd.

Our view

The high dependence of the Company’s results on oil prices ensures sufficient predictability of revenues. We also estimate the allowable increase in the cost of sales within 4%, inflation from the beginning of the year was 3.8%. The absence of non-monetary losses during 1H2017 positively affected the receipt of net profit. Nevertheless, the results of 1H2016 do not keep pace with the expected indicators in the annual section. According to the results of this year, we expect a net profit of $43mn, while the first half of the year is limited to obtaining a net profit of $13.5mn. At the same time, we positively assess the Company’s commitment to the plans for the completion of UPG-3. Given the possible downtime in the production, stated in the press release, we see the advisability of revising our forecasts.

To date, Nostrum shares are traded at a premium of 42% to our 12M target price. On the other hand, since the last review (May, 2017), expectations for oil prices on the market have changed markedly, mainly in the direction of decline.

Due to changes in the main factors, we note the need to update our target price and put our recommendation under review.

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