Deutsche Rohstoff — Strong free cash flow expected in H218

Deutsche Rohstoff (DB: DR0)

Last close As at 20/12/2024

29.40

1.10 (3.89%)

Market capitalisation

150m

More on this equity

Research: Energy & Resources

Deutsche Rohstoff — Strong free cash flow expected in H218

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).

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Energy & Resources

Deutsche Rohstoff

Strong free cash flow expected in H218

Oil & gas

Scale research report - Update

27 September 2018

Price

€19.76

Market cap

€100m

Share price graph

Share details

Code

DR0

Listing

Deutsche Börse Scale

Shares in issue

5.06m

Net debt as at 30 June 2018

€54.0m

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’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.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA

(€m)

EPS

(€)

DPS
(€)

Capex

(€)

Yield
(%)

12/16

9.2

6.4

0.02

0.60

(38.8)

3.0

12/17

53.7

36.1

1.10

0.65

(51.6)

3.3

12/18e

90.6

78.3

3.11

0.73

(12.3)

3.7

12/19e

95.0

73.4

2.89

0.73

(71.1)

3.7

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

Cash and cash equivalents

83,032

28,090

29,699

Total assets

128,054

193,472

213,574

Total debt

57,962

75,243

106,576

Total liability

62,185

109,146

121,901

Shareholders’ equity

61,840

66,121

56,675

Cash flow statement

Net cash from operating activities

1,193

2,914

37,848

Net cash from investing activities

(15,100)

(38,791)

(51,625)

Net cash from financing activities

(14,066)

11,516

24,735

Net cash flow

(27,972)

(24,360)

10,958

Bank balances (including investments)

48,445

24,634

28,368

Net debt/(cash)

(25,070)

47,153

76,877

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

Asset

Value basis

Value (€m)

Value per share (€)

Value (€m)

Value per share (€)

Oil & gas

- 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

Market value

98.8

19.5

98.8

19.5

Delta

26%

26%

47%

47%

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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