Main support for 9M2018 results has had the price of oil, however the positive price factor may be exhausted. Despite the low production and due to the increase in the average price of Brent by 38% yoy, revenue increased by 17% yoy to $406mn and EBITDA strengthened by 9% yoy to $188mn. It is expected that due to the price of oil the company will be able to reach a profit in 2018. In addition, with the exception of oil taxes, the main items of expenditure were reduced. As a result, Nostrum managed to complete 9M2018 with a net profit of $12mn against a loss for 9M2017 of $25mn. Nevertheless, we continue to point out that optimism regarding the strong price factor will be exhausted over time due to the lack of growth triggers on the oil price relative to 2016 levels. In this regard, we note the increased risk associated with the high uncertainty of the company achieving the optimal production level. With the consensus forecast of Bloomberg on the price of oil, suggesting an increase in the price to $74/bbl by 2022 and a decrease to $70/bbl by 2023, our expectations for the company's revenues were revised downwards by an average of 32%, mainly due to lower forecasts for production volumes.
Bore flooding and the risk of low recoil drilling contributed to the revision of forecasts. Disappointing mining results for 9M2018 were connected with problems in the exploitation of existing bores, as a result of which Nostrum lowered its drilling and production plans, and this year it expects to extract 30ths boepd while 40ths boepd were previously laid by us. We expect that production in 2019 will be a little bit lower than the level planned by the company and will not exceed 28ths boepd. In the absence of inventory estimates, the probability of disappointing drilling results, in our opinion, prevails. We are pledging a slow growth in production by an average of 3% by 2023.
Loan portfolio of Nostrum remains attractive at a current yield of 22%. At the estimated total debt to EBITDA in 2018 at 3.5x, the expected future cash flows may not be sufficient to bonds maturity in 2022 ($725mn). The risk of a shortage of free cash is fairly estimated by the market with a current yield of 22% (2022 repayment) and we estimate a high probability of partial refinancing of Eurobonds with a maturity of 2022, because we do not note visible accelerators for the growth of cash flows in the foreseeable future. Noting the disappointing production forecasts that are putting pressure on the company's credit profile, on the one hand, and the relatively attractive market yield of bonds, on the other, we maintain our “Hold” recommendation for Nostrum bonds.
Hold recommendation with 12M TP GBp135/share. Our new target price is GBp135/share. If there is a risk of low production, we positively estimate the optimization of expenses beyond comparable reduction in sales level. Despite the low reasonableness of assessing the resource potential of the company and the existing problems in exploration of existing bores, we do not exclude progress in production in the case of successful drilling of new bores, which, however, cannot act as a full-pledged growth trigger. In the view of the high uncertainty, we maintain our “Hold” recommendation for Nostrum shares.
