US onshore organic growth

Deutsche Rohstoff 17 May 2019 Update
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Deutsche Rohstoff

US onshore organic growth

Oil & gas

Scale research report - Update

17 May 2019

Price

€17.45

Market cap

€88m

Share price graph

Share details

Code

DR0

Listing

Deutsche Börse Scale

Shares in issue

5.06m

Net debt at 31 March 2019

€32.5m

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 US onshore.

Technology driving increased US returns.

Bear

Diverse commodity focus for a small company.

Disparate US peer group.

High operational leverage if oil prices fall.

Analysts

Sanjeev Bahl

+44 (0)20 3077 5742

Carlos Gomes

+44 (0)20 3077 5722

Deutsche Rohstoff’s (DRAG) organic investments, c $145m in FY17 and FY18, helped deliver more than 100% growth in FY18 revenues to €109.1m (€53.7m in FY17). Year-on-year sales growth was supported by a material increase in oil and gas production, which almost doubled to 9.4kboed (from 5.1kboed in FY17), combined with higher price realisations. EBITDA rose more than 250% to €97.9m (€36.1m in FY17), while net income (after minority interests) rose to €13.9m (€7.7m in FY17). DRAG’s key focus remains on its US oil and gas interests, with c $70m of organic and internally funded investment planned in 2019. As a result, DRAG guides to EBITDA in the €25–35m range in FY19 and €55–65m in FY20, reflecting recent divestments and underlying growth from Cub Creek Energy.

Organic investment and asset monetisation

FY18 was marked by organic investment in development well locations and the sale of the bulk of the Salt Creek Oil & Gas asset base in North Dakota. Organic investment is to continue in FY19 with c $70m planned in DRAG’s US subsidiaries, and c $60m of the total being invested in Cub Creek Energy well locations. Management’s EBITDA guidance for FY19 is based solely on current production and for FY20 on expected growth driven by investment in Cub Creek based on a $58/bbl WTI and $2.75/mcf price deck. Guidance excludes acquisitions or asset divestments, both of which remain a key component of DRAG’s strategy.

Metals positive value development expected in FY19

DRAG’s metals division reported a loss in FY18 due to asset write-downs at Hammer Metals and Devonian Metals. However, management sees a point of inflexion with Almonty Industries, DRAG’s most material metals investment, generating a profit in Q119, and nearing Sangdong mine financing.

Valuation: Below audited 1P and 2P reserve values

DRAG’s most recent independent 1P and 2P valuation of its oil and gas assets totals €186.3m, including Elster Oil & Gas, Cub Creek Energy, Salt Creek Oil & Gas and the new subsidiary Bright Rock Energy. We assume the company’s mining assets are valued at book value, adding in end-2018 net debt. This amounts to a SOTP valuation of c €119.4m or €23.6/share, rising to €24.9/share including 2P reserves. DRAG currently trades at a 35% discount to its 1P reserve value and a 43% discount to its 2P reserve value on this basis.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

Capex
(€m)

Yield
(%)

12/17

53.7

36.1

1.10

0.65

(51.8)

3.7

12/18

109.1

97.9

2.74

0.70

(66.2)

4.0

12/19e

77.4*

79.0*

0.46

0.65

(80.3)

3.7

12/20e

99.9

70.0

2.39

0.65

(20.6)

3.7

Source: Deutsche Rohstoff, Refinitiv consensus as at 10 May 2019. Note: *Revenue consensus based on two estimates and EBITDA based on only one estimate, resulting in revenue lower than EBITDA.

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.

FY18: Asset monetisation and production increase

DRAG’s business strategy involves the identification, development and monetisation of attractive resource projects in the Americas and Europe. In 2018, group revenue increased to €109.1m from €53.7m in 2017 and EBITDA increased to €97.9m from €36.1m. The company currently has four US oil and gas assets – a 93.00% stake in Elster Oil & Gas, 88.46% in Cub Creek Energy, 100.00% in Salt Creek Oil & Gas, and 95.18% in newly founded Bright Rock Energy. Its strategy of buy, build and monetise is in evidence with the sale, agreed in April 2018, of most of Salt Creek’s assets. The group also laid the foundation for growth in 2018 by increasing its working interest in the US onshore drilling locations through Elster Oil & Gas and Cub Creek Energy in Colorado. In addition, Bright Rock Energy acquired its first acreage in Utah. These investments resulted in DRAG holding interests in 154 wells onshore US at the end of FY18.

Exhibit 1: DRAG subsidiaries

Source: DRAG

Following a confirmed investment of approximately $70.0m through 2019, production is expected to increase significantly in 2020 and DRAG expects to benefit from the recent rise in WTI, which currently stands at c $60/bbl.

DRAG’s metal investments continue to benefit from a rise in underlying commodity prices. Metals at book value make up just 13% of our SOTP valuation.

Financials

DRAG is exposed to fluctuations in realised prices across multiple commodities, with greater leverage to oil and gas prices in the US, and regional discounts to the WTI crude and Henry Hub benchmarks.

Consensus versus guidance

Management guides at FY19 sales of €40–50m and EBITDA of €25–35m, c 30% and 47% lower than FY18, primarily driven by natural well depletion and forecast new investments expected to come online in early 2020. In FY20, the company guides at sales of €75–85m and an EBITDA of €55–65m. Current consensus expectations do not appear to reflect recent asset divestments or management guidance on future profitability/dividend payments. DRAG’s cash position and securities, held at €60.0.m at year-end FY18 (€56.8m as at 31 March 2019), provide sufficient liquidity for organic investment in the company’s existing asset footprint, the acreage built out of Bright Rock Energy with a focus on Utah/North Dakota, and the potential acquisition of further proven, developed producing reserves on an opportunistic basis.

Exhibit 2: Financial summary and consensus forecasts

German GAAP (€000s)

2016

2017

2018

2019e

2020e

Income statement

 

 

 

 

 

Sales revenue

9,170

53,746

109,052

77,366*

99,907

Growth %

383%

486%

103%

-29%

29%

EBITDA

6,374

36,126

97,933

79,000*

70,000

EBITDA margin %

70%

67%

90%

102%

70%

EBIT

(541)

5,300

32,700

26,366

43,907

Net profit (after minority interests)

102

5,549

13,872

2,535

12,290

Number of shares (000s)

5,063

5,063

5,063

5,063

5,063

EPS adj. (€/share)

0.02

1.10

2.74

0.46

2.39

DPS (€)

0.60

0.65

0.70

0.65

0.65

Balance sheet

Cash and cash equivalents

28,090

29,699

59,989

Total assets

193,472

213,574

224,845

Total debt

75,243

106,576

93,385

Total liability

109,146

121,901

151,007

Shareholders’ equity

66,121

56,675

Cash flow statement

Net cash from operating activities

2,914

37,848

68,674

Net cash from investing activities

(38,791)

(51,625)

(28,268)

Net cash from financing activities

11,516

24,735

(28,626)

Net cash flow

(24,360)

10,958

11,780

Bank balances (including investments)

24,634

28,368

45,646

Net debt/(cash)

47,153

76,877

33,395

Source: Deutsche Rohstoff, Refinitiv, Edison Investment Research. Note: *Average revenue consensus based on two estimates and EBITDA based on only one estimate, hence revenue consensus lower than EBITDA consensus.

Valuation

Considering the independent reserve valuation presented by DRAG in February 2019, the company’s market value is 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. We believe asset value is an appropriate basis for valuing DRAG over traditional P&L metrics such as P/E or EV/EBITDA due to the nature of its investments.

Our year-end 2018 SOTP valuation (Exhibit 3) has slightly decreased compared to the 2017 year-end. The valuation of oil and gas assets and the mining assets book value have decreased, offset by a reduction in net debt (from €76.9m to €33.4m), driven by the disposal of Salt Creek acreage.

At the time of the independent report valuation, the WTI price was $51.44/bbl. If oil prices remain at current spot levels, above $60/bbl, a material upward revision to reserve values would be expected. We provide an updated SOTP valuation based on the latest numbers released by DRAG below, which moves marginally from our May 2018 update note (-0.4%).

Exhibit 3: DRAG assets and per-share value

CPR net NPV10 1P

CPR net NPV10 2P

Asset

Value basis

Value (€m)

Value per share (€)

Value (€m)

Value per share (€)

Oil & gas assets

CPR*

15.7

3.1

15.7

3.1

Mining assets

Book value FY18

0.0

0.0

0.0

0.0

Cash at bank

Book value FY18

60.0

11.8

60.0

11.8

Debt

Book value FY18

(93.4)

(18.4)

(93.4)

(18.4)

Total equity valuation

119.4

23.6

126.2

24.9

Market value**

88.4

17.5

88.4

17.5

Difference

35%

35%

43%

43%

Source: Deutsche Rohstoff, Edison Investment Research. Note: Number of shares: 5.063m; US$/€1.29. *Ryder Scott CPR (Cub Creek and Elster) dated December 2018. **Share price as at 10 May 2019.


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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.

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 Edison analyst 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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