Solid H1 results, strong cash flow generation

Deutsche Rohstoff 17 August 2021 Update
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Deutsche Rohstoff

Solid H1 results, strong cash flow generation

Oil & gas

Scale research report - Update

17 August 2021

Price

€16.1

Market cap

€82m

Share price graph

Share details

Code

DR0

Listing

Deutsche Börse Scale

Shares in issue

5.082m

Net debt at end Q221

€79.2m

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 United States.

Bull

High operational leverage provides benefit in a strong oil price environment.

Cheaply acquired undeveloped acreage offering potential for up to 100 new wells.

Stable liquid position.

Bear

A permanently low oil price (WTI<$40/bbl) would threaten DRAG’s existence.

May be unable to raise sufficiently low-cost debt.

Faster than expected declines in existing wells, or more than expected uneconomic wells in yet-to-be-developed acreage.

Analysts

James Magness

+44(0)20 3077 5700

Elaine Reynolds

+44(0)20 3077 5713

Strong production and oil prices led to Deutsche Rohstoff’s (DRAG’s) solid results in H121 with EBITDA up 150% to c €40m (c €16m in H120) and net cash flow generation of c €17m. Management, which is typically conservative, has increased earnings guidance for 2021 and 2022. An extensive $60m drilling programme, comprising 12 wells at Cub Creek’s Knight pad and one well at Bright Rock’s new acreage in Wyoming, is due for completion by end-Q3 with production commencing in Q4.

Strong cash flow generation in H1

Production has been running at full capacity since early January, with oil production at c 3,700bopd and oil and gas production at 7,801boepd (higher-than-expected due to increased gas at the Olander pad). Combined with strong oil prices, this led to a solid performance in H121. EBITDA increased by c 150% to c €40m in H121 versus €15.8m in H120. Strong net cash flow generation of c €17m compares to a c negative €47m in H120, assisted by sales of shares in oil and gas and mining companies of c €12m. Due to the strong results, management has upgraded revenue and EBITDA guidance for 2021 and 2022. The mid-point of EBITDA guidance was increased by 34% for 2021 and 16% for 2022.

Investment in drilling to provide upside by end-2021

An extensive $60m investment programme in 12 wells at Cub Creek’s Knight pad and one well at Bright Rock’s new acreage (acquired in June 2020) in Wyoming is due for completion by the end of Q3 with production commencing in Q4. This would provide further upside to management’s oil and gas production guidance of 5,700–6,300boepd, which has been surpassed already in H1.

Valuation: Below audited reserve values

DRAG’s 8 March 2021 independent 1P and 2P valuation of its oil and gas assets was $211.6m (€176.3m), including Elster Oil & Gas, Cub Creek Energy, Salt Creek Oil & Gas and Bright Rock Energy. It assumes a long-term oil price of c $55/bbl. We assume DRAG’s mining assets are valued at book value and adjusted for end-H121 net debt. This amounts to a sum-of-the-parts (SOTP) valuation for 1P reserves of c €114m or €22.3/share (39% above the current share price), rising to €26.2/share including 2P reserves.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

Capex
(€m)

Dividend yield (%)
(%)

12/19

41.2

22.7

0.1

0.1

28.7

0.6

12/20

38.7

23.9

(3.1)

0.0

36.8

N/A

12/21e*

69.5

44.5

>0**

N/A***

N/A

***

12/22e*

67.5

42.5

>0**

N/A***

N/A

***

Source: Edison Investment Research, DRAG. Note: *FY21 and FY22 figures are mid points of company guidance. **DRAG expects to achieve clearly positive group results in both FY21 and FY22. ***Payment of a reliable and, if possible, increasing dividend remains a key objective.

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.

Strong increase in production

Higher than expected oil and gas production in H121, combined with increased oil prices, has delivered a strong set of half year results for DRAG. Net average oil and gas production for H121 was 7,801boepd across all four of the company’s subsidiaries: Cub Creek Energy and Elster Oil & Gas in Colorado, Bright Rock Energy in Wyoming and Utah and Salt Creek Oil & Gas in North Dakota. This is ahead of full year guidance of 5,700–6,300boepd. The production was skewed towards Q2 at 9,155boepd, with Q1 at 6,432boepd and resulted from higher-than-expected gas content from Cub Creek’s Olander pad (c 80% of production comes from Cub Creek). Overall, oil production remained more or less flat in Q2 (3,641bopd) versus Q1 (3,659bopd), which, again, is above full year guidance (2,300–2,600bopd).

Exhibit 1: Oil and gas production reported in Q120 to Q221 versus guidance for FY21 (boepd) and oil production (bopd)

Source: Edison Investment Research, DRAG

In its most extensive drilling programme to date, Cub Creek drilled 12 wells from the Knight pad, which sits immediately to the west of Olander, between February and May 2021. Each well has a horizontal section of 2.25 miles and the campaign cost c $60m of which Cub Creek pays c 90%. The wells are currently being completed and are expected to come onstream in Q421.

Exhibit 2: Location of Knight and Olander pads, Colorado

Source: Deutsche Rohstoff

Bright Rock is looking to advance the development of c 28,000 acres which it acquired in Wyoming in 2020 through the drilling of a well in 2021. The objective of the well is to prove the economics of the acreage and will be used to define and hold an area of approximately 10,000 acres, known as a federal unit. A drilling permit was issued in March 2021 and the well is expected to be drilled in August 2021.

Financials

Revenue for the first six months of the year was €38.8m, nearly 50% above H120 (€26.1m), while EBITDA more than doubled to €39.9m (from €15.8m in H120). EBITDA includes other operating income of €13.9m, of which €11.7m relates to income from sale of shares in oil and gas and mining companies (oil equities and bonds have now largely been sold). This performance has resulted in management increasing its guidance for revenue and EBITDA for 2021 and 2022; this upgrade was made on the release of the preliminary H121 results on 6 July. In 2021, it has a revised full year revenue forecast of €68–73m (previously €57–62m) together with projected EBITDA of €57–62m (previously €42–47m), and in 2022, revenue is upgraded to €70–75m (previously €60–65m) and EBITDA to €47–52m (previously €40–45m). Management’s forecast is based on an expected average oil price (WTI) of $70/bbl in Q321, $65/bbl in Q421 and $60/bbl in FY22 (previously $60/bbl in both years), and a gas price (Henry Hub) of $3.0/mmbtu in 2021 and $2.75/mmbtu in 2022. It assumes a €/$ exchange rate of 1.22. The EBITDA guidance for 2021 is higher than 2022 due to the income from sales of shares in 2021.

Strong net cash generation in H121 of €16.8m (€36.8m at the operating level) resulted in cash increasing from €22.8m at end-2020 to €41.3m at end-H121 and net debt decreasing from €105.6m at end-2020 to €79.3m at end-H121. We note that net cash generation becomes c €5m when adjusted for sales of shares in oil and gas and mining companies; solid cash generation should continue in the coming quarters assuming the oil price remains strong.

Exhibit 3: Financial summary

€’000

2016

2017

2018

2019

2020

H121*

Income statement

 

 

 

 

 

 

Sales revenue

9,170

53,746

109,052

41,204

38,683

38,814

% growth

383%

486%

103%

-62%

-6%

49%

Other operating income

10,497

1,124

19,060

4,312

7,692

13,886

EBITDA (reported)

6,374

36,138

97,933

22,725

23,935

39,915

% margin

70%

67%

90%

55%

62%

103%

EBITDA (adjusted)**

-1,923

35,014

79,251

20,283

18,243

26,029

% margin

n/m

65%

73%

49%

47%

67%

EBIT (reported)

-541

5,306

32,691

5,630

-16,135

22,546

Net profit (after minority interests) (reported)

102

5,549

13,872

308

-15,509

16,523

Number of shares (‘000)

5,063

5,063

5,063

5,082

5,082

5,082

EPS (reported) (€)

0.02

1.10

2.74

0.06

-3.05

3.25

DPS (€)

0.60

0.65

0.70

0.10

0.00

0.00

Balance sheet

 

 

 

 

 

 

Fixed assets

120,556

148,361

126,985

161,690

134,671

131,063

Financial assets (non-current)

21,043

22,710

22,001

36,780

35,697

35,970

Cash and cash equivalents, including marketable securities

28,091

29,699

59,989

66,637

22,816

41,263

Total assets

193,472

213,574

224,845

278,925

206,722

226,619

Total debt

75,243

106,576

93,385

139,111

128,381

120,562

Total liabilities

127,351

156,899

151,007

207,424

161,133

160,406

Shareholders’ equity

66,121

56,675

73,837

71,501

45,589

66,213

Net debt

47,152

76,877

33,395

72,474

105,566

79,299

Cash flow statement

 

 

 

 

 

 

Net cash from operating activities

13,991

37,848

68,674

13,938

13,991

36,796

Net cash from investing activities

-48,730

-51,625

-28,268

-34,238

-48,730

-8,381

Net cash from financing activities

-17,692

24,735

-28,626

35,292

-17,692

-11,321

Forex movement

639

-7,225

5,136

1,004

639

254

Net cash flow

-53,071

18,183

6,644

13,989

-53,071

16,841

Cash and cash equivalents

24,634

28,368

45,646

61,281

8,210

25,558

Capex (included in net cash from investing activities)

-36,841

-51,775

-66,208

-28,728

-36,841

-10,229

Source: Edison Investment Research, DRAG. Note: *Unaudited; ** Adjusted for one-offs and other operating income.

Valuation

We have calculated a SOTP valuation (Exhibit 4) for DRAG, based on the following:

An independent oil and gas reserves valuation (competent person’s report, or CPR), dated 8 March 2021, published by the company, which valued 1P+2P reserves at $211.6m (€176.3m). We show separate valuations for 1P and 2P reserves.

Book value of financial assets at end-H121 (€36.0m). This includes listed shareholdings in Almonty Industries, Hammer Metals and Northern Oil & Gas, as well as an unlisted shareholding in Rhein Petroleum.

Book value of net debt at end-H121 (€79.3m).

The per share valuation based on 1P reserves is €22.3, which is 39% above the current share price of €16.1. Including the 2P reserves adds €3.8 per share, giving a share valuation of €26.2, which is 63% above the current share price. The CPR is based on a long-term oil price assumption of c $55/bbl (Nymex forward price), which is the same price assumption that DRAG adopts in project appraisals.

Exhibit 4: DRAG assets and per share value

Asset

Valuation
basis

Reserves
(mboe)

Valuation
(€m)

Value per share (€)

Oil & gas assets:

CPR*

2P reserves

14.6

19.5

3.8

1P reserves

128.8

156.8

30.9

Sub-total

143.4

176.3

34.7

Financial assets (non-current)

H121 book value

36.0

7.1

Cash and cash equivalents

H121 book value

25.6

5.0

Marketable securities

H121 book value

15.7

3.1

Total debt

H121 book value

(120.6)

(23.7)

Total equity valuation: 1P+2P reserves

133.0

26.2

Excluding 2P reserves

(19.5)

(3.8)

Total equity valuation: 1P reserves

113.5

22.3

Market value

81.8

16.1

% difference

39%

39%

Source: Edison Investment Research, DRAG. Note: Number of shares: 5.082m; $1.2/€. *CPR dated 8 March 2021. **Share price at 16 August 2021.

As a downside sensitivity, we note that DRAG also published a CPR, dated 31 December 2020, based on a long-term oil price assumption of c $45/bbl (Nymex forward price at that date). This report valued 1P+2P reserves at €119.5m (using $1.2/€). All else equal, this gives a share valuation based on 1P+2P reserves of €15.0, or €12.6 based on 1P reserves. We note that the oil prices have enjoyed a sustained rally since the year end, with the WTI spot price averaging c $64/bbl ytd.


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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.

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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 2021 Edison Investment Research Limited (Edison).

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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.

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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.

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.

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