First Berlin Equity Research has published a research update on Deutsche Rohstoff AG (ISIN: DE000A0XYG76). Analyst Simon Scholes reiterated his BUY rating and increased the price target from EUR 34.00 to EUR 38.00.

DRAG’s preliminary 2022 results were close to our forecasts. Revenue jumped 126% to €165.4m (FBe: €165.6m; 2021: €73.3m) while EBITDA came in at €139.1m (FBe: €140.9m; 2021: €66.1m). The improvement in the results stemmed from a 35% increase in volume to 9,600 boepd and a 67% increase in realised Euro-denominated pricing helped by a 12% rise in the USDEUR exchange rate. We expect volume to climb by a further 6% this year to over 10,100 boepd on the back of new production in Wyoming and Utah and a full year’s contribution from wells drilled last year. The futures strip indicates an average oil price of USD71.1 for 2023 (down 25% on the 2022 figure of USD94.9). However, we expect more favourable hedging arrangements than in 2022 to limit the decline in the euro-denominated boe price after hedging to 10%. We thus expect only a 5% decline in revenue for this year and EBITDA to remain robust at €121m. DRAG’s reserve report for 1 January 2023 showed proven undeveloped reserves of 20.9m BOE. According to the independent reserve auditors who prepared the report, developing these reserves would cost USD399m. So far DRAG has announced CAPEX of USD158m for 2023 and 2024. In previous reports, we included only existing wells and ongoing and announced drilling projects in our valuation of DRAG. There is no difference in risk between an announced project based on proven reserves, and an unannounced project based on proven reserves (both can be postponed if commodity prices develop unfavourably). Therefore, our present report includes announced CAPEX plus assumed additional CAPEX of USD241m during 2024-2026 to bring online the remaining proven undeveloped reserves, most of which are in Wyoming. At the current level of the commodities futures strips, DRAG should be able to manage this additional CAPEX without unduly straining its balance sheet. Our model now shows end 2026 gearing of a very manageable 14%. The inclusion in our valuation model of all proven undeveloped reserves more than cancels out the oil price decline since our last study of 19 December 2022 and causes us to raise our price target from €34.0 to €38.0. We maintain our Buy recommendation.