Berenberg downgrades Nostrum as Chinarevskoye field disappoints

Analysts at Berenberg double-downgraded Nostrum Oil and Gas on Wednesday after its hopes for "an operational turnaround" were dashed.

Berenberg, which lowered Nostrum from 'buy' to 'sell', said its expected turnaround for the group was based on its 2019 drilling programme in the northern area of the Chinarevskoye field in Kazakhstan, where the company had previously made an encouraging discovery.

However, one of Nostrum's two wells failed to flow at commercial levels, leading Berenberg to slash its target price on the group from 200p to just 25p as a result of "yet another operational disappointment".

With a total of three wells now lost due to earlier-than-expected water ingress, Berenberg raised significant questions about the productivity of the field and the validity of its proven and probable reserves, which led Nostrum's management to commission a geological study of the field, expected to show results closer to the end of the year.

"In the absence of further upside from the core producing area of the Chinarevskoye field, all hope was on the northern area, where Nostrum successfully brought a well into production earlier this year," said Berenberg, who also reduced its resource estimate for the northern area to 25m barrels of oil from 50m.

While Nostrum's gas treatment facility still held some strategic value, Berenberg noted that the group was facing some "significant" refinancing risks", with management likely to commence refinancing negotiations relating to its two outstanding bonds in 2020.

"This process will be challenging if an operational turnaround is not achieved by then," said Berenberg. "While there is potential for value creation through tolling agreements, time may be running out for Nostrum to put such agreements in place before refinancing negotiations."

At 1025 BST, the shares were down 18% at 28.84p.