Production to increase by early 2021

Deutsche Rohstoff 3 September 2020 Update
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Deutsche Rohstoff

Production to increase by early 2021

Oil & gas

Scale research report - Update

3 September 2020

Price

€9.10

Market cap

€46m

Share price graph

Share details

Code

DR0

Listing

Deutsche Börse Scale

Shares in issue

5.08m

Net debt at 30 June 2020

€95.0m

Business description

Deutsche Rohstoff identifies, develops and monetises resource projects in North America, Australia and Europe. The company’s focus is on the development of oil and gas opportunities in the US.

Bull

Track record of value creation.

Acquisition opportunities in US onshore.

Stable liquid position in current environment.

Bear

Diverse commodity focus for a small company.

Disparate US peer group.

High operational leverage if oil prices fall.

Analyst

Carlos Gomes

+44 (0)20 3077 5722

Deutsche Rohstoff (DRAG) was quick to react to the COVID-19 pandemic, in cutting production from its operated Cub Creek Olander pad in mid-March 2020. This had been brought online at end 2019 and was producing c 6,000bbl/d when DRAG decided to halt production. It enabled DRAG to avoid selling oil production at historical uneconomic low oil prices and manage remaining production with its hedged portfolio. Revenues in H120 of €26.1m included €10.1m from hedging income. As oil prices are recovering from the March/April lows, management expects to restart production, beginning with Cub Creek legacy pads. This strategic flexibility is possible due to DRAG’s liquidity and healthy balance sheet. Management guides to FY20e sales at the higher end of €33–37m and EBITDA of c €15–18m, mainly due to the recent recovery and stabilisation of oil prices in the US.

Production cutbacks to protect value

In H120, DRAG’s average production was 5,022boed, resulting in revenues of €26.1m, of which €10.1m resulted from hedging realisations. The largest contributor to production was Cub Creek, which had increasing volumes from the Olander pad in Q120 before the production curtailments. As oil prices recover, DRAG expects to bring production online, starting with resumption of full production of the older pads from October 2020, and restarting Olander once oil prices rise.

Commodity price uncertainty leads to write-downs

In response to the impact of COVID-19 on the global economy and increasing oil price volatility, DRAG’s management decided to write down c €17.2m of the company’s assets to protect the balance sheet from the low oil price environment. This affected earnings, with DRAG reporting a net loss of €13.4m in H120.

Valuation: Below audited reserve values

DRAG’s February 2020 independent 1P and 2P valuation of its oil and gas assets was €178.0m, including Elster Oil & Gas, Cub Creek Energy, Salt Creek Oil & Gas and Bright Rock Energy. Although c 55% of DRAG’s 2020 production is hedged at a minimum price of $57.12/bbl, oil prices have significantly dropped since the CPR valuation date of the reserves. We assume the company’s mining assets are valued at book value and deduct H120 net debt. This amounts to a SOTP valuation of c €104m or €20.4/share, rising to €22.1/share including 2P reserves.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

Capex
(€m)

Yield
(%)

12/18

109.05

97.93

2.74

0.70

(66.2)

7.7

12/19

41.20

22.70

0.06

0.10

(49.7)

1.1

Source: Deutsche Rohstoff

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Quick response to COVID-19 protected H120 results

As for most oil and gas companies, the first half of 2020 was dominated by the impact of COVID-19 on the global economy. However, following the sharp decline in oil prices in March 2020, DRAG’s management was quick to react and took several measures to contain the impact of the pandemic and safeguard the balance sheet. The company cut back oil production at Cub Creek, thereby avoiding having to sell production at historical uneconomic low prices. The positioning of DRAG’s hedge portfolio also supported a controlled cutback in production, generating additional income of c €10.1m in the period. These measures resulted in average production of 5,022boed in the first half of the year. Cub Creek Energy produced rising volumes from the Olander well pad until mid-March, when management decided to cut back production, which reached 6,000bbl/d until then.

Exhibit 1: DRAG share price performance vs S&P Oil & Gas and WTI since January 2020

Source: Edison Investment Research, Refinitiv at 31 August 2020

Overall, COVID-19 posed challenges for the global economy and oil & gas sector, and a medium-term perspective that is difficult to assess. The danger of oversupply to the oil market remains, especially if demand crashes again. However, since mid-June, oil prices seem to have stabilised with supply and demand finding a new balance. WTI has been trading at c $40/bbl over the last couple of months. If oil prices recover, DRAG’s management expects that production in the US should start increasing from the beginning of 2021 at the latest. A resumption of full production at Cub Creek’s legacy pads is planned in the coming weeks, which is expected to increase current production by around 500bbl/d from October. The Olander pad is not expected to resume production until prices have recovered even further.

Financials

Revenue for the first six-months of the year amounted to €26.1m versus €24.2m in the same period of 2019, and EBITDA increased from €15.2m to €15.8m. Given the financial results in H120 and that oil prices have stabilised somewhat in recent months, management is now guiding to sales at the upper end of its forecast €33–37m and for EBITDA to exceed the previously guided €15m but to be within €15–18m. It bases this on an average US oil price of $40/bbl, Henry Hub gas price of $2.0/mmBtu and an FX rate of US$/€ 1.17.

Overall, DRAG has solid liquidity to weather current headwinds following the placing of the corporate bond in late 2019, which raised c €87.1m. End-H120 cash stood at c €33.8m, leaving DRAG in a healthy position to make investments and take advantage of the opportunities arising from the current environment in the oil & gas market.

Exhibit 2: Financial summary

German GAAP (€000s)

2016

2017

2018

2019

H120

INCOME STATEMENT

 

 

 

 

Sales revenue

9,170

53,746

109,052

41,204

26,121

Growth %

383%

486%

103%

-62%

N/A

EBITDA

6,374

36,126

97,933

22,700

15,769

EBITDA Margin %

70%

67%

90%

55%

60%

EBIT

(541)

5,300

32,700

5,600

(15,550)

Net profit (after minority interests)

102

5,549

13,872

308

(13,281)

Number of shares (000s)

5,063

5,063

5,063

5,082

5,082

EPS adj. (€/share)

0.02

1.10

2.74

0.06

(2.61)

DPS (€)

0.60

0.65

0.70

0.10

BALANCE SHEET

Cash and cash equivalents

28,090

29,699

59,989

66,637

33,792

Total assets

193,472

213,574

224,845

278,925

221,760

Total debt

75,243

106,576

93,385

139,111

128,776

Total liability

109,146

121,901

151,007

207,424

163,554

Shareholders’ equity

66,121

56,675

73,837

71,501

58,206

CASH FLOW STATEMENT

Net cash from operating activities

2,914

37,848

68,674

34,935

Net cash from investing activities

(38,791)

(51,625)

(28,268)

(55,234)

Net cash from financing activities

11,516

24,735

(28,626)

35,292

Net cash flow

(24,360)

10,958

11,780

14,993

Bank balances (including investments)

24,634

28,368

45,646

61,281

13,877

Net debt/(cash)

47,153

76,877

33,395

72,474

94,984

Source: Deutsche Rohstoff

Valuation

Considering the independent reserve valuation presented by DRAG in February 2020, the company’s market value is now below the NPV10 of the 1P and 2P reserves for its net oil and gas investments, plus the book value of mining assets minus net debt. Due to the nature of its investments, traditionally we have valued DRAG on an asset value basis over traditional P&L metrics such as P/E or EV/EBITDA. However, we should also take into consideration current market volatility and the downward pressure on short-tern oil and gas prices.

At the time of the independent valuation (February 2020), oil and gas prices were stable and the CPR could not have anticipated the impact of the coronavirus on global oil and gas demand, nor the extent of oil price weakness. The calculation of revenues and cash flows was based on the NYMEX forward curve at 31 December 2019 with an average WTI price of $53.11/bbl. However, EIA estimates at 11 August for FY20 and FY21 show realised WTl prices at $35.50/bbl and $45.53/bbl respectively.

We have calculated a SOTP valuation (Exhibit 3). Based on the February 2020 CPR and end-H120 balance sheet data, the SOTP valuation has slightly decreased compared to end 2019. In light of the uncertainty for oil prices for the coming years, DRAG impaired the book value of Elster and the shares of Northern Oil & Gas. These write-downs are non-cash, but reduce the company’s balance sheet exposure. If oil prices remain at higher levels, there may be additional earnings potential. Net debt also increased from €72.5m at year-end 2019 to €95.0m at end June 2020.

Exhibit 3: DRAG assets and per-share value

CPR net NPV10 1P

CPR net NPV10 2P

Asset

Value basis

Value
(€m)

Value per share
(€/share)

Value
(€m)

Value per share
(€/share)

Oil & gas assets

CPR*

169.5

33.4

178.0

35.0

Mining and oil investments

H120 book value

29.1

5.7

29.1

5.7

Cash at bank

H120 book value

33.8

6.6

33.8

6.6

Debt

H120 book value

(128.8)

(25.3)

(128.8)

(25.3)

Total equity valuation

103.7

20.4

112.2

22.1

Market value**

46.2

9.1

46.2

9.1

Difference

124%

124%

143%

143%

Source: Deutsche Rohstoff, Edison Investment Research. Note: Number of shares: 5.082m; $1.10/€. *CPR dated December 2019. **Share price as at 31 August 2020.

As mentioned above, realised oil prices in 2020 have been lower than anticipated at the time of the CPR. However, management expects a pick-up in oil prices in the second half of the year as restrictions on movement around the world decrease and the global economy recovers. If oil prices remain lower for a longer period, we would observe a decrease in the value of oil & gas assets.


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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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