First Berlin – Deutsche Rohstoff AG Research Update (11/01/2018)

First Berlin Equity Research has published a research update on Deutsche Rohstoff AG (ISIN: DE000A0XYG76). Analyst Simon Scholes upgraded the stock to BUY and increased the price target from EUR 22.30 to EUR 29.30.

DRAG stands to benefit from the reduction in the US corporate tax rate from 35% to 21%. The move will raise future net income at DRAG's three US-based oil and gas businesses, Cub Creek Energy (CCE), Elster Oil & Gas (EOG) and Salt Creek Oil & Gas (Salt Creek). In addition, since our note of 22 November the oil price futures curve has shifted upward by between USD1.50 and USD3.00 with near term prices rising most strongly. Lastly, DRAG's stake in CCE - the most valuable of its US oil and gas holdings - rose from 80% to 88.5% following the departure of the business' CEO, Robert Gardner, to pursue other opportunities. The management team at CCE now consists of Dan Berberick (Vice President of Exploration), who joined the company in 2014, and Scott B. Baily (Vice President - Land and Business Development), who has been with DRAG since 2013. The changes described above cause us to raise our enterprise valuation of DRAG's U.S. oil and gas operations by 22.9% to €197.7m (previously: €160.9m). Given that these businesses account for over 90% of our enterprise valuation, and we estimate that DRAG had net debt of €60.6m at the end of 2017, our price target rises by 31.3% to €29.3 (previously: €22.3). The recommendation moves from Add to Buy.