Weak financial results for 2018 despite rising oil prices. According to the 2018 FY results, the company's net loss increased 5 times to $121 million, while the company's revenue fell by 4% to $390mn, and the company significantly reduced operating expenses. Thus, the cost of sales decreased by 7% yoy, general and administrative expenses decreased by 33% yoy and sales expenses by 25% yoy. The main pressure on the 2018 result was impairment at $150mn (38% of revenue), which the company attributed to a decrease in its 2P reserves (Proved and Probable). At the same time, even without taking into account the one-time impairment expense, we observe a lower net profit in comparison with our expectations.
Limited growth with low reserves. Reserves of category 2P (proven + probable) decreased by 16% to 410mn boe due to watering in the north-eastern part of the Biysk reservoir and the loss of reserves in the territory in its immediate vicinity. The company maintains production forecast for 2019 unchanged and expects to produce 30ths boepd, which do not include additional production volumes from new wells planned for drilling for the current year. We also do not believe that the results of drilling new wells in areas with unproven reserves will introduce additional volumes, on the basis of which we also do not expect the company to reach the level of average daily production in excess of 30ths boepd in the current year. Relevant assessment of reserves allows us to calculate the approximate level of production that a company is able to reach under current conditions. We expect to increase production from 30ths to 40ths to only by 2023 with maintaining this level without noticeable growth until the end of the forecast period. We believe that the current resource potential will not allow the company to accelerate the dynamics of production. We also observe an oil price forecast correction compared to the previous estimate and note that for a company experiencing technical difficulties in production, additional production in the absence of a rise in commodity prices may be economically inappropriate.
Recommendation «Hold» with 12M TP, GBp101/share. We enlarged the discount rate from 13% to 14% by increasing the risk premium due to the possibility of unforeseen circumstances, which the company may declare on the basis of a retrospective. Our production forecasts have risen from a total of 28-36ths boepd, while the median price has been adjusted according to Bloomberg forecasts from the range of $68-$74 to $65-$67 per barrel in 2019-2025. Our new target price fell from the previous GBp135/share to GBp101/share. With a 10% upside potential, we maintain our Hold recommendation pending Shlumberger’s valuation results and assessing high uncertainty regarding production prospects. On the one hand, we remain cautious, observing the company's vulnerability to production levels due to the fact that oil has exhausted its positive impact on cash flows, weakening the growth rate. On the other hand, in the case of justified sufficiency of reserves in the licensed area, after peer review, we see good opportunities for Nostrum to increase cash flows, because from a financial point of view, the company demonstrates rapid adaptation (significant cost reduction) and sustainability of profitability.
