Relevant Documents:2022 Bond Prospectus2025 Bond Prospectus
Nostrum Oil & Gas’ bondholders are working with PJT on the group’s possible debt restructuring, sources told Reorg. Legal advisors have been pitching to the bondholder group, with likely candidates being Akin Gump and Dechert, sources said.
PJT and the law firms did not respond to Reorg’s request for comment.
The group’s bondholders include ICU, Amundi, Fidelity, Promeritum and VR Capital, sources told Reorg. ICU also holds about 24% of the group’s shares, according to sources, which may prevent it from joining the bondholder group in a possible restructuring process.
Any restructuring is likely to involve heavy equitization of the debt, sources close said. The group's share price has fallen by 89% over the last year to 9.26 pence. An equitization would potentially allow noteholders to benefit from upside related to the company’s gas treatment infrastructure assets, which are covered in further detail below. In a hypothetical equitization, new debt that the company would receive in addition to equity stakes - take-back paper - could mitigate potential losses resulting from a future restructuring, assuming it has relatively attractive terms such as security, and/or cash flow sweeps.
The company has appointed Rothschild as its financial advisor and White & Case as its legal advisor, as
reported. Rothschild beat Evercore in the final round, sources told Reorg.
Nostrum faces a $29 million coupon payment, which is on July 25 for its $725 million 8% 2022 bond and a $14 million coupon on Aug. 16 for its $400 million 7% 2025 notes, whereas the company only has $65 million of cash as of March 31. Despite the company announcing that it has sufficient liquidity to meet its coupons in the third quarter, sources suggested the group may decide to not pay in order to conserve cash, given that the coupons will cost it more than half of its cash balance.
Both the notes have gained 10 points since the end of April and are quoted at 24 on the back of the rise in oil prices. Brent oil prices have risen by 59% from April 27 to $31.83 today, May 6.
Production has fallen in the group’s oil and gas business consecutively over the last three years and it has decided to halt drilling this year. Reorg’s previous
analysis of the situation suggested that the company could attempt to compensate bondholders by offering a double-digit PIK/cash coupon. The analysis noted that, since the company’s production is declining, it will likely have to develop a cautious approach regarding its pro forma capital structure. Nostrum’s forecast average daily production volume for 2020 is 20,000 barrels of oil equivalent per day, which is 30% lower year over year than its production in 2019.
Nostrum has previously
said that it is going to focus on securing third-party contracts for its three gas treatment units, or GTUs. One creditor said it did not feel the bond price accounts for the value of the group’s infrastructure.
So far the group has secured a gas supply contract with Ural Oil and Gas, which should generate $50 million of free cash flow per annum assuming 500 million cubic meters, or mcm per year of raw gas production entering the group’s treatment units, and natural gas prices of $2.40 per million cubic feet, or mcf (1 mcm = 35.3 mcf). The group’s CEO Kai-Uwe Kessel
said that if this increased to 1 billion cubic meters it would result in double the amount of free cash flow.
Sources noted that Nostrum’s treatment units are in a resource-rich area and there are enough gas producers in the area for the asset to be commercially feasible.
If management’s projections for Ural are extrapolated to fill the three GTUs’ maximum capacity of 4.2 bcm, the group could generate $400 million of EBITDA, sources estimated. One creditor anticipates that it is feasible for the group to reach this target.
However, the cash flow estimate based on maximum capacity was provided when oil prices were $60 per barrel. In today’s commodity price environment, the estimates may need to be updated to reflect the uncertainty around the company’s ability to negotiate terms with gas suppliers that would translate to $400 million of EBITDA, given the commodity price environment.
Given the bond trading prices, the market value of the company’s debt is about $270 million, suggesting that the market is heavily discounting the company’s ability to secure enough contracts to generate $400 million of EBITDA.
The delivery of gas from the Ural contract has been
delayed as the group is waiting on Ural to construct a pipeline to transport the gas to the GTU. The deadline for this is set for 2023, which is beyond the maturity of its 2022 bond.
One potential candidate for a third-party contract is KPO, which owns Karachaganak field in north-west Kazakhstan, one source said. The field covers an area of more than 280 square kilometers. It holds estimated hydrocarbons initially in place (HIIP) of 9 billion barrels of condensate and 48 trillion cubic feet of gas, according to KPO’s
website.
Another source suggested that the company could lose its infrastructure assets if the state decides to suspend or revoke its existing concessions. The group has three exploration concessions, which are primarily conducted through its oil and gas producing entity Zhaikmunai in Kazakhstan, according to the bond prospectuses.
Nostrum’s
prospectus explains that pursuant to Article 36 of the Subsoil Law, any transfer or pledge of subsoil use rights, including transfers of direct and indirect equity interests in a company holding subsoil use rights, requires the consent of the Ministry of Energy of Kazakhstan.
Nostrum operates pursuant to a subsoil use license and product-sharing agreement, or PSA, its prospectus explains. Any suspension, revocation, or termination of the license or PSA could result in the group losing rights in its material infrastructure investments at Chinarevskoye Field, including the gas treatment facility. The group does not independently own any significant assets at the field that are not connected to the license or PSA.
Background
Nostrum Oil & Gas, the group’s parent, is a U.K.-based company, while the intermediate holdco guarantor and the issuer are both registered in the Netherlands.
The company’s bonds are governed by New York law. Citibank’s London branch is the trustee for each set of unsecured notes.
One structural benefit for bondholders is that Nostrum Oil & Gas Finance’s obligations are guaranteed by the group’s Kazakhstan-based operating company Zhaikmunai LLC.
A corporate tree is below:
Nostrum’s largest shareholder is Kazakhstan-based engineering and construction company KazStroyService, which owns 25.7% of Nostrum’s common shares through Mayfair Investments.
A 2014 Nostrum equity
prospectus explains that KazStroyService Global BV was at the time “indirectly controlled” by Timur Kulibayev, Arvind Tiku, Lakshmi Mittal and Goldman Sachs. Kulibayev is the son-in-law of Kazakhstan former President Nursultan Nazarbayev and has held several senior positions in state commodity companies. Kulibayev was involved in the alleged expropriation of Kazakhstan energy company Tristan Oil’s assets, discussed
HERE, with intel
HERE.
A capital structure is below:
|
09/30/2019
|
|
EBITDA Multiple
|
---|
(USD in Thousands)
|
Amount
|
Price
|
Mkt. Val.
|
Maturity
|
Rate
|
Yield
|
Book
|
Market
|
---|
|
8% Senior Unsecured Notes due 2022
|
725,000.0
|
24.0
|
174,000.0
|
Jul-25-2022
|
8.000%
|
|
|
7% Senior Unsecured Notes due 2025
|
400,000.0
|
24.0
|
96,000.0
|
Feb-16-2025
|
7.000%
|
31.950%
|
|
Total Senior Unsecured Debt
|
1,125,000.0
|
|
270,000.0
|
|
4.8x
|
1.2x
|
Total Debt
|
1,125,000.0
|
|
270,000.0
|
|
4.8x
|
1.2x
|
Less: Cash and Equivalents
|
(91,281.0)
|
|
(91,281.0)
|
|
Net Debt
|
1,033,719.0
|
|
178,719.0
|
|
4.4x
|
0.8x
|
Plus: Market Capitalization
|
10,193.0
|
|
10,193.0
|
|
Enterprise Value
|
1,043,912.0
|
|
188,912.0
|
|
4.5x
|
0.8x
|
Operating Metrics
|
LTM Reorg EBITDA
|
234,515.0
|
|
|
Liquidity
|
Plus: Cash and Equivalents
|
91,281.0
|
|
Total Liquidity
|
91,281.0
|
|
Credit Metrics
|
Gross Leverage
|
4.8x
|
|
Net Leverage
|
4.4x
|
|
Notes:
$65mm cash, cash equivalents as of March 31
|
--Bianca Boorer, Kyle Owusu