Deutsche Rohstoff AG (DE:DR0G) has a track record of shareholder value creation through timely investments in the resources sector across a range of commodities and geographies. The company’s investment in Tekton Energy, for example, generated a 365% return on equity over three years. DRAG’s current focus is on the development of oil and gas opportunities onshore US. Management expects to make strong returns on investment, drilling unconventional acreage in the Williston Basin and the Wattenberg field, while also using the company’s balance sheet to acquire additional assets. Future returns will be susceptible to management’s ability to anticipate commodity price cycles, structure transactions and exploit acquired assets.
Focus on the fragmented US onshore market
DRAG has successfully acquired, developed and monetised assets in the Williston Basin and Wattenberg field, both of which remain the focus of its current asset base. Well pad returns are relatively high in the current commodity price environment, and, with break-evens at c $35/bbl, highly leveraged to commodity prices.
Activity for 2017 and funding
DRAG expects to continue to monetise its US onshore assets through work programmes, much of which is to be funded through cash generation and debt. However, management may choose to monetise more capital-intensive assets. At a group level, DRAG is well capitalised with €24.6m of cash and €75.2m of debt at year end 2016 (reserve-based lending component priced at 3.74%). The company and management are well regarded and as such DRAG bonds trade 6% above par.
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