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Research: Energy & Resources
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.
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Deutsche Rohstoff |
Production to increase by early 2021
Oil & gas |
Scale research report - Update
3 September 2020 |
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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.
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Consensus estimates
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.
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Exhibit 1: DRAG share price performance vs S&P Oil & Gas and WTI since January 2020 |
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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 |
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|
|
|
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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 |
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BALANCE SHEET |
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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 |
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Net cash from operating activities |
2,914 |
37,848 |
68,674 |
34,935 |
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Net cash from investing activities |
(38,791) |
(51,625) |
(28,268) |
(55,234) |
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Net cash from financing activities |
11,516 |
24,735 |
(28,626) |
35,292 |
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Net cash flow |
(24,360) |
10,958 |
11,780 |
14,993 |
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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 |
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Asset |
Value basis |
Value |
Value per share |
Value |
Value per 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 |
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Market value** |
46.2 |
9.1 |
46.2 |
9.1 |
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Difference |
124% |
124% |
143% |
143% |
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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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Research: Metals & Mining
Auriant’s Q220 financial results were reported in the context of known production of 243kg. While this was 12.6% less than in Q120, some degree of moderation was inevitable as the company shifted from processing high-grade ore in January and February to average-grade ore in the following months. In addition, the usual contribution from Solcocon (which is always weather dependent, but which usually begins in Q2) has, this year, been delayed until Q3. Finally, whereas there was an over-sale of 39kg (1,247oz) of gold relative to production in Q1, there was an under-sale of 23kg (748oz) in Q2. Nevertheless, both throughput and costs were consistent with the smooth running of the new carbon-in-leach plant at Tardan and the effect of COVID-19 on operations has, to date, remained minimal. In combination with our updated gold prices, we have upgraded both our FY20 forecasts (see Exhibit 1) and our valuation of the company.