Nostrum Oil announces significant downgrade in reserves

Pre-Caspian Basin-focussed exploration, development and production company Nostrum Oil & Gas updated the market on its operations on Tuesday, reporting that average daily production for the year as at 25 March was above 23,000 barrels of oil equivalent per day.

The London-listed firm said 2019 average daily production totalled 28,587 barrels of oil equivalent per day, down from 31,254 barrels per day in 2018, which corresponded to average daily sales volumes of 26,671 barrels equivalent per day in 2019, down from 29,516 barrels in 2018.

It said its third gas treatment unit, GTU3, was now complete and commissioned, adding that its focus remained on commercialising the spare capacity in the “world-class” gas processing infrastructure.

A total of 46 wells were in production as at 31 December, 20 of which were oil wells and 26 were gas-condensate wells.

Nostrum said drilling had now been halted for 2020, and said its 2P reserves stood at 138 million barrels of oil equivalent, which was a reduction of 66.3% year-on-year.

On the financial front, the company said its current cash balance as at 25 March was $65m, and said its third quarter coupon payment was covered at current oil prices.

Nostrum had started a strategic review on 24 June to optimise its value and that of its assets, and said a range of options, including a formal sale process and the acquisition of Positive Invest, were evaluated.

The company had announced in January that it would focus on commercialising the spare capacity in its gas processing infrastructure, lower-risk reservoir management and a reorganisation to a lower cost base.

It explained that a “comprehensive” process was run to assess interest from potential acquirers of the firm, and their ability to deliver an offer that could be recommended to shareholders.

That, it said on Tuesday, had not led to any firm proposals being received, with the board saying it did not believe there was merit in prolonging the process, confirming that it was no longer in a formal sales process under the code.

In addition the directors said they would not be presenting a shareholder circular in connection with the acquisition of Positive Invest given the current oil price environment and constraints on liquidity.

As such, it has now ceased to be in an "offer period" as defined in the code.

The disclosure requirements under rule 8 of the code were no longer applicable, and the firm said it would now seek to engage with its bondholders regarding a possible restructuring of its outstanding bonds.

“In these challenging times, we remain focused on the safety of our people and have adapted our operations to ensure their continued welfare and to ensure we comply with all government guidelines in relation to Covid-19 in the countries we operate in,” said chief executive officer Kaat Van Hecke.

“We are taking a prudent approach to running our business with a sharp focus on financial discipline and maintaining liquidity.

“At current oil prices we are able to cover our next coupon payment in the third quarter 2020 but recognise the precarious liquidity position of the company and will therefore look to engage with our bondholders.”

Van Hecke explained that, given the postponement of the full-year results, it had published its 2019 reserve report, confirming that reserves had reduced by 272 million barrels of oil equivalent.

“The reduction in reserves follows a significant amount of work carried out both internally and by third parties during 2019 to better understand the productivity of our reservoirs.

“We will continue to try to recover as many hydrocarbons as possible from Chinarevskoye field but the focus for filling our infrastructure has moved to obtaining more third-party volumes.

“This reserve downgrade will lead to a significant impairment being taken when we release our full year results.”

At 0857 BST, shares in Nostrum Oil & Gas were down 2.53% at 5p.