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Research: Energy & Resources
Deutsche Rohstoff’s (DRAG’s) business model has been built around management’s ability to identify, develop and monetise assets across multiple resources. In H118 the group delivered a 68% increase in revenue and a 121% increase in EBITDA y-o-y, driven by increased oil and gas production, profits on asset sales and higher commodity prices. In April 2018, Salt Creek Oil & Gas signed a sale and purchase agreement with Northern Oil & Gas to divest most of its acreage in the Williston Basin, resulting in $40m of cash proceeds, $7.6m reimbursement for investments made and 6m shares, valued at $21.5m as at 21 September 2018. Management expects continued FCF growth (excluding Salt Creek divestment) in H218, driven by strong production performance from Elster Oil & Gas with realisations at current commodity prices. A mid-year cash position and securities held of €63.6m (up from €47.1m at June 2017) was driven by the Salt Creek sale proceeds and issue of a €10.7m convertible bond in March 2018 (3.625% coupon and €28 strike price).
Written by
Deutsche Rohstoff |
Strong free cash flow expected in H218
Oil & gas |
Scale research report - Update
27 September 2018 |
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Deutsche Rohstoff’s (DRAG’s) business model has been built around management’s ability to identify, develop and monetise assets across multiple resources. In H118 the group delivered a 68% increase in revenue and a 121% increase in EBITDA y-o-y, driven by increased oil and gas production, profits on asset sales and higher commodity prices. In April 2018, Salt Creek Oil & Gas signed a sale and purchase agreement with Northern Oil & Gas to divest most of its acreage in the Williston Basin, resulting in $40m of cash proceeds, $7.6m reimbursement for investments made and 6m shares, valued at $21.5m as at 21 September 2018. Management expects continued FCF growth (excluding Salt Creek divestment) in H218, driven by strong production performance from Elster Oil & Gas with realisations at current commodity prices. A mid-year cash position and securities held of €63.6m (up from €47.1m at June 2017) was driven by the Salt Creek sale proceeds and issue of a €10.7m convertible bond in March 2018 (3.625% coupon and €28 strike price).
Growth in US production and realisations
In H118, production increased significantly to 1.69mmboe compared to 1.0mmboe in H117. Of this, c 56% was oil; the remainder was natural gas and condensates. Production from Elster was above management expectations, offsetting a weaker than expected outturn for Cub Creek. The non-cash depreciation charge at Cub Creek increased in H118. However, at €52m EBITDA was a material improvement on the prior year (€23.4m), driven by higher production, realised prices and lower overheads. Management has increased revenue expectations for 2018 from €75–85m to €90–100m, and EBITDA from €65–70m to €85–90m.
Valuation: At a discount to 1P and 2P value
DRAG’s most recent independent 1P CPR valuation of its oil and gas assets totals €178.3m, including Elster Oil & Gas and Cub Creek Energy. We include net sale proceeds for Salt Creek and assume the company’s mining assets are valued at book value (with listed investments marked to market), adding in end 2017 net debt to reflect the oil asset CPR discount date. This amounts to a SOTP valuation of c €124.4m or €24.6/share, rising to €28.7/share including 2P reserves. DRAG trades at a 26% discount to its 1P reserve value and a 47% discount to its 2P reserve value on this basis.
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Consensus estimates
Source: Deutsche Rohstoff, Bloomberg |
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.
Financials
Consensus expectations for 2018 are towards the lower end of management guidance for both revenue and EBITDA, but have scope to be revised upwards if commodity prices remain close to spot levels. DRAG’s cash position and securities held at €63.6m provides liquidity to invest in the company’s existing asset footprint, a newly founded company named 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 1: Financial summary and consensus forecasts
German GAAP (€000s) |
2015 |
2016 |
2017 |
2018e |
2019e |
Income statement |
|
|
|
|
|
Sales revenue |
1,899 |
9,170 |
53,746 |
90,600 |
95,000 |
Growth % |
(92%) |
383% |
486% |
888% |
5% |
EBITDA |
4,906 |
6,374 |
36,126 |
78,300 |
73,400 |
EBITDA margin % |
258% |
70% |
67% |
86% |
77% |
EBIT |
2,419 |
(541) |
5,300 |
45,800 |
47,600 |
Net profit (after minority interests) |
(557) |
102 |
5,549 |
16,600 |
15,700 |
Number of shares (000s) |
5,063 |
5,063 |
5,063 |
5,063 |
5,063 |
EPS adj. (€/share) |
(0.11) |
0.02 |
1.10 |
3.11 |
2.89 |
DPS |
0.55 |
0.60 |
0.65 |
0.73 |
0.73 |
Balance sheet – selected data |
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Cash and cash equivalents |
83,032 |
28,090 |
29,699 |
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Total assets |
128,054 |
193,472 |
213,574 |
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Total debt |
57,962 |
75,243 |
106,576 |
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Total liability |
62,185 |
109,146 |
121,901 |
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Shareholders’ equity |
61,840 |
66,121 |
56,675 |
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Cash flow statement |
|||||
Net cash from operating activities |
1,193 |
2,914 |
37,848 |
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Net cash from investing activities |
(15,100) |
(38,791) |
(51,625) |
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Net cash from financing activities |
(14,066) |
11,516 |
24,735 |
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Net cash flow |
(27,972) |
(24,360) |
10,958 |
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Bank balances (including investments) |
48,445 |
24,634 |
28,368 |
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Net debt/(cash) |
(25,070) |
47,153 |
76,877 |
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Source: Deutsche Rohstoff, Bloomberg, Edison Investment Research
Valuation
If oil prices remain at current spot levels, a significant upwards revision to Elster reserve value at end 2018 should be expected, with WTI having risen from c $60/bbl at year-end 2017 to c $75/bbl spot. Current exchanges rates are similar to 2017 year-end. An updated SOTP valuation is provided below; it moves marginally from our May 2018 update (+4%) driven by currency rates and the sale proceeds from Salt Creek Oil & Gas.
Exhibit 2: DRAG assets and per-share value
CPR net NPV10 1P |
CPR net NPV10 2P |
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Asset |
Value basis |
Value (€m) |
Value per share (€) |
Value (€m) |
Value per share (€) |
Oil & gas |
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- Ryder Scott CPR* (Cub Creek and Elster) |
CPR |
126.1 |
24.9 |
146.9 |
29.0 |
- Salt Creek SPA** |
Sales proceeds based on Northern share price*** |
52.2 |
10.3 |
52.2 |
10.3 |
Mining assets |
Book value FY17 (listed investments as of 13 Sept 2017) |
22.9 |
4.5 |
22.9 |
4.5 |
Cash at bank |
Book value FY17 |
29.7 |
5.9 |
29.7 |
5.9 |
Debt |
Book value FY17 |
(106.6) |
(21.0) |
(106.6) |
(21.0) |
Total equity valuation |
124.4 |
24.6 |
145.1 |
28.7 |
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Market value |
98.8 |
19.5 |
98.8 |
19.5 |
|
Delta |
26% |
26% |
47% |
47% |
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Source: Deutsche Rohstoff, Edison Investment Research. Note: US$/€1.21. *CPR dated December 2017. **DRAG owns 90% of Salt Creek. ***Share price as at 21 September 2018.
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Entertainment One’s (eOne’s) pre-close trading update confirms the group is trading well and is on track to meet full-year market forecasts. There is no change to our forecasts at this juncture. The group’s rights library has been independently reassessed and has increased to a value of US$2.0bn, from US$1.7bn at the time of the last valuation in March 2017. The group’s current market capitalisation is c £1.8bn (US$2.3bn). Recent strong share price performance has narrowed the discount to peers, but further positive news flow would allow additional upside.