First Berlin – Deutsche Rohstoff AG Research Update (24/03/2020)

First Berlin Equity Research has published a research update on Deutsche Rohstoff AG (ISIN: DE000A0XYG76). Analyst Simon Scholes reiterated his BUY rating and decreased the price target from EUR 18.10 to EUR 8.70.

Abstract
The lowest oil price since 2001 has pushed DRAG's share price to its lowest level since the company listed in 2010. However, current cash operating costs are under USD15/BOE (barrel of oil equivalent). Given that CAPEX will be small as long as the oil price remains depressed, we expect DRAG to be able to generate free cashflow even at an oil price of USD20. We estimate that the company currently has a net debt position of €74m (€122m in bonds and bank debt; €49m in cash and securities). The largest element of the debt position is €115m of bonds. But none of the bonds mature this year and 75% of the total mature in December 2024. The weighted average coupon is 5.2%. The low cost of production from existing wells as well as long-dated debt suggest that DRAG will be able to withstand a prolonged period of low commodity prices. Furthermore, we note that at the lowpoint of the three deepest oil price downturns so far this century, in 2001, 2008 and 2016, the futures market underestimated the average oil price over the following four years by 92%, 46% and 37% respectively. We have taken this into account in our current valuation and assume an average oil price 35% above the futures curve from January 2021. Our new price target is €8.70 (previously: €18.10), and we maintain our Buy recommendation.