Nostrum Oil and Gas downgraded to 'CCC' on refinancing concerns; Outlook Negative
Almaty. February 5. KazTAG - S&P Global Ratings has downgraded Nostrum Oil and Gas rating to CCC with a negative outlook.
"Nostrum announced in its 2020 guidance that it will stop drilling until it can find a technical solution to resolve geological issues, and that it will likely produce only 20,000 boepd this year. This is a significant drop from last year's already-low 26,700 boepd. In our updated base-case scenario for Nostrum, we assume that these developments will result in a material deterioration of EBITDA and funds from operations (FFO).This will put pronounced pressure on credit metrics, with FFO to debt dropping below 5% in 2020-2021, versus 13% in 2018, and debt to EBITDA of 9x-10x in the same period, versus 4.7x in 2017. Our new estimates highlight our view of Nostrum's unsustainable capital structure. Nostrum has struggled with operational issues since 2017, when the company lost several production wells due to watering, then some drilled exploratory wells turned out to be dry. Nostrum has been working on resolutions but has not been able to stabilize production levels, which showed continued decline from 45,000 boepd in fourth-quarter 2016 to 24,000 boepd in fourth-quarter 2019," reads the statement.
"The company's next maturity is in 2022, but we see no tangible path to deleveraging at this stage. Nostrum has very high reported debt of $1.1 billion. As we published on July 3, 2019, we continue to believe the company has very limited capacities to reduce debt in the next two years . The depressed operating scenario with no drilling and therefore very limited production upside potential will likely stop the company from refinancing its $725 million notes due July 2022. Although the company still has a meaningful cash balance of $91 million and does not have any maturities before 2022, we think management might be inclined to approach lenders with a distressed exchange offer in the next 12 months," said the report.
Nostrum currently does not have any binding offers for the company or its assets. In mid-2019, the company launched a strategic review to consider a number of long-term development options. Among other things, this included:The disposal of all or a fraction of the company. Nostrum reported the company has not received any binding offers so far; Financing in cash the up to $54 million acquisition (maximum amount) of Stepnoy Leopard, an adjacent oil field close to Nostrum infrastructure, which we understand is currently on hold; and Additional throughput agreements with third-party gas suppliers (such as the contract with Ural Oil&Gas for processing 500 mcm of its raw gas at 4.2 bcm Nostrum's capacities per year).
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