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Research: Energy & Resources
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.
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Deutsche Rohstoff |
Solid H1 results, strong cash flow generation
Oil & gas |
Scale research report - Update
17 August 2021 |
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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.
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Consensus estimates
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).
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Exhibit 1: Oil and gas production reported in Q120 to Q221 versus guidance for FY21 (boepd) and oil production (bopd) |
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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.
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Exhibit 2: Location of Knight and Olander pads, Colorado |
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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 |
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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 |
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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 |
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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:
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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.
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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.
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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 |
Reserves |
Valuation |
Value per share (€) |
Oil & gas assets: |
CPR* |
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2P reserves |
14.6 |
19.5 |
3.8 |
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1P reserves |
128.8 |
156.8 |
30.9 |
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Sub-total |
143.4 |
176.3 |
34.7 |
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Financial assets (non-current) |
H121 book value |
36.0 |
7.1 |
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Cash and cash equivalents |
H121 book value |
25.6 |
5.0 |
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Marketable securities |
H121 book value |
15.7 |
3.1 |
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Total debt |
H121 book value |
(120.6) |
(23.7) |
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Total equity valuation: 1P+2P reserves |
133.0 |
26.2 |
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Excluding 2P reserves |
(19.5) |
(3.8) |
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Total equity valuation: 1P reserves |
113.5 |
22.3 |
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Market value |
81.8 |
16.1 |
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% 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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Research: Financials
Bancassurance advisory and service platform JDC Group (JDC) reported8strong H121 results and has raised FY21 revenue and EBITDA guidance to what we still believe to be conservative levels. Large client wins are starting to feed into the platform and the pipeline of new major clients looks promising. Based on 2021/22e consensus EV/sales and EV/EBITDA, the valuation does not seem demanding compared to its other platform peers.