Deutsche Rohstoff — Cub Creek wells on budget and on target

Deutsche Rohstoff (DB: DR0)

Last close As at 28/03/2024

29.40

1.10 (3.89%)

Market capitalisation

150m

More on this equity

Research: Energy & Resources

Deutsche Rohstoff — Cub Creek wells on budget and on target

Deutsche Rohstoff’s (DR0) main focus is the development of oil and gas production in the US. At end FY18, DR0 held interests in 44 operated horizontal wells and 40 non-operated wells in Colorado, with minor interests in numerous wells in North Dakota and Utah. DR0 almost doubled production from 5.1kboed in FY17 to 9.6kboed in FY18. A c $60m drilling campaign was initiated in Q219 at Cub Creek, Colorado. FY18 was marked by the $59.6m sale of Salt Creek, delivering c 40% ROIC. DR0’s management sees a point of inflexion in the metals unit, with Almonty Industries (12.8% stake) generating a profit in for the nine months ended 30 June 2019 and nearing Sangdong mine financing. Management guides to FY19 sales of €40–50m and EBITDA of €25–35m, lower than FY18, mainly due to natural well depletion and new investments expected to come online in early 2020. For FY20, it guides sales of €75–85m and EBITDA of €55–65m.

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Written by

Energy & Resources

Deutsche Rohstoff

Cub Creek wells on budget and on target

Oil & gas

Scale research report - Update

5 September 2019

Price

€13.10

Market cap

€67m

Share price graph

Share details

Code

DR0

Listing

Deutsche Börse Scale

Shares in issue

5.08m

Net debt as at 30 June 2019

€52.2m

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 US.

Bull

Track record of value creation.

Acquisition opportunities in 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.

Analyst

Carlos Gomes

+44 (0)20 3077 5722

Deutsche Rohstoff’s (DR0) main focus is the development of oil and gas production in the US. At end FY18, DR0 held interests in 44 operated horizontal wells and 40 non-operated wells in Colorado, with minor interests in numerous wells in North Dakota and Utah. DR0 almost doubled production from 5.1kboed in FY17 to 9.6kboed in FY18. A c $60m drilling campaign was initiated in Q219 at Cub Creek, Colorado. FY18 was marked by the $59.6m sale of Salt Creek, delivering c 40% ROIC. DR0’s management sees a point of inflexion in the metals unit, with Almonty Industries (12.8% stake) generating a profit in for the nine months ended 30 June 2019 and nearing Sangdong mine financing. Management guides to FY19 sales of €40–50m and EBITDA of €25–35m, lower than FY18, mainly due to natural well depletion and new investments expected to come online in early 2020. For FY20, it guides sales of €75–85m and EBITDA of €55–65m.

Drilling programme at Cub Creek

A drilling programme is currently underway at Cub Creek. The $60m plan is to drill 11 horizontal wells and production is scheduled to commence in early 2020. Cub Creek has another well pad in the area, and according to current plans, a similar number of wells could be drilled in 2020. Elster is also expected to take part in drilling activities in the coming months, with a c $5–10m investment.

US oil and gas production is core

Colorado subsidiaries Cub Creek Energy and Elster Oil & Gas are the largest contributors to group oil and gas production. While DR0 continues to invest in the region, its strategy also includes expanding in Utah and North Dakota, seeking business opportunities to develop and monetise. The Salt Creek disposal in FY18 with an ROIC of 40% is a success story that DR0 intends to replicate.

Valuation: Undervalued versus 1P and 2P reserves

DR0’s end-FY18 independent 1P and 2P valuation of its oil and gas assets totalled $186.3m. We apply H119 book values to the company’s mining and oil investments, minus H119 net debt of €52.2m. This amounts to a SOTP valuation of c €137.3m or €27.0/share, rising to €28.6/share including 2P reserves. DR0 currently trades at a 52% discount to its 1P reserve value and a 54% discount to its 2P reserve value on this basis. Further detail on the valuation was presented in our last note.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

Capex
(€m)

Yield
(%)

12/17

53.75

36.13

1.10

0.65

(51.8)

5.0

12/18

109.05

97.93

2.74

0.70

(66.2)

5.3

12/19e

N/A

N/A

N/A

N/A

N/A

N/A

12/20e

N/A

N/A

N/A

N/A

N/A

N/A

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.

Setting the ground for a production increase

DR0’s core subsidiaries onshore US, Cub Creek Energy and Elster Oil & Gas, like all companies in the DJ Basin, struggled with operational and infrastructural issues during the first half of 2019, but production was in line with management expectations. Further optimisation of existing production facilities is underway in these assets, and gas lift, which is already equipped in two pads, is to be implemented in the remaining two pads, in H219 at Cub Creek to maintain production. Meanwhile, a $60m drilling programme at Cub Creek is underway. The plan is to drill 11 horizontal wells from the Olander pad and production is scheduled to commence in early 2020. This should lead to a material uplift in the group’s US production.

In H119, Salt Creek Energy and Bright Rock Energy completed acquisitions in Utah and North Dakota, set to be strategic growth drivers for the group in the near term. In Germany, Rhein Petroleum (DR0 10% stake) had an exploration success with the Steig-1 well discovery. The well has been tested and the size and development potential are currently being evaluated.

Financials: 2019 down but 2020 production boost

Recent H119 results showed revenues of €24.2m, down from €54.1m, based on group (net) oil and gas sales of 5.3kboed. These are predominately in the US, with Cub Creek and Elster Oil & Gas accounting for €10.5m and €12.1m respectively. EBITDA of €15.2m (vs H118 €52m) was in line with management expectations.

Exhibit 1: Financial summary

German GAAP (€000s)

2016

2017

2018

Income statement

 

 

 

Sales revenue

9,170

53,746

109,052

Growth %

383%

486%

103%

EBITDA

6,374

36,126

97,933

EBITDA Margin %

70%

67%

90%

EBIT

(541)

5,300

32,700

Net profit (after minority interests)

102

5,549

13,872

Number of shares (000s)*

5,063

5,063

5,063

EPS adj. (€/share)

0.02

1.10

2.74

DPS (€)

0.60

0.65

0.70

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. Note: *H119 number of shares: 5,082m.

Management guides to FY19 sales of €40–50m and EBITDA of €25–35m, c 30% and 47% lower than FY18, primarily driven by natural well depletion. Production at Elster Oil & Gas is expected to normalise from September 2019.

In FY20, the company guides to sales of €75–85m and EBITDA of €55–65m, which incorporates the added production and revenues from the $60m investment in Cub Creek’s Olander site and the c $5–10m investment by Elster to boost production. Current consensus expectations do not appear to reflect recent asset divestments or management guidance on future profitability and dividend payments.

DR0’s end-June 2019 balance sheet showed net debt of €52.2m (a 60% increase since end 2018), reflecting the high levels of investment at Salt Creek Oil & Gas and Bright Rock Energy at c €10.2m. These outlays will reduce considerably in 2020 and simultaneously lead to expanded production, revenues and earnings. DR0 also transferred securities from current assets to fixed assets so they are not accounted in cash and cash equivalents anymore.

Valuation

Since there is no reserve update since our last note, the only driver behind the change in our valuation is the foreign exchange update from $1.29/€ to $1.13/€. The US dollar has appreciated when compared to the euro, and since DR0’s oil and gas revenues are in US dollars, this reflects positively in the company valuation. The NPV10 of the 1P and 2P reserves for its net oil and gas assets, plus the H119 book value of mining and oil investments minus net debt, is now €137.3m (€27.0/share) and €145.2m respectively (€28.6/share).

At the time of the independent report valuation, the WTI price was $51.44 per barrel before transport and marketing costs. On average, for the first half the year, DR0 achieved a selling price after transport costs of approximately $52.45 per barrel, relatively in line with the competent person’s report (CPR).

Exhibit 2: DR0 assets and per-share value

Asset

Value basis

CPR net NPV10 1P

CPR net NPV10 2P

Value
(€m)

Value per share
(€/share)

Value
(€m)

Value per share
(€/share)

Oil & gas assets

CPR*

157.1

30.9

164.9

32.5

Mining and oil investments

H119 book value

32.4

6.4

32.4

6.4

Cash at bank

H119 book value

35.4

7.0

35.4

7.0

Debt

H119 book value

(87.5)

(17.2)

(87.5)

(17.2)

Total equity valuation

137.3

27.0

145.2

28.6

Market value**

66.6

13.1

66.6

13.1

Difference

106%

106%

118%

118%

Source: Deutsche Rohstoff, Edison Investment Research. Note: Number of shares: 5.082m; $1.13/€. *Ryder Scott CPR (Cub Creek and Elster) dated December 2018. **Share price as at 27 August 2019.

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