High prices the only cure for Nostrum

To explain why, it’s helpful to return to the start of 2016. Three years ago, despite a crash in the oil price to $27 (£20) a barrel, investors could feasibly point to the arrival of the GTU3 gas processing hub, and a surge in low-cost production to relieve pressure on the explorer-producer’s balance sheet. Indeed, Nostrum was happy to declare a “clear path to delivering 100,000 barrels of oil equivalent per day (boepd)” by 2020, at a flat oil price of just $44 a barrel. Once the GTU3 hub was commissioned, spare capacity would inevitably be filled by drilling activities, resulting in a step change in cash flows, even if prices remained subdued.

Three years later, prices are back above $60 a barrel, but first gas from GTU3 is still months away, and full commissioning isn’t expected until the end of September. That’s bad enough, but Nostrum has a bigger problem on its hands: reservoir issues at the Biyski North-east and western area of the Chinarevskoye field, which contributed to a $150m impairment to the 2018 balance sheet.  

Hopes have now been pinned on reservoir specialist Schlumberger, which has been hired to help Nostrum come up with a plan to increase production. A study is due in the third quarter of 2019, though to “avoid any stress on [its] short-term liquidity position”, the board has decided to reduce its number of active rigs elsewhere.

With no hedging programme to speak of, and sales forecast to fall to 28,000boepd in 2019, liquidity is already a concern. In the past two years, Nostrum has consolidated its borrowings into two bonds, thereby extending its debt maturity profile. However, annual interest payments – 8 per cent on the $725m notes due 2022, and 7 per cent on the $400m notes due 2025 – are now a combined $86m. In 2018, when output was higher, profits after non-income-related taxes, admin costs, and transport and sales expenses came to just $123m.