On 30 April 2020, Ernst & Young LLP (UK) issued a disclaimer of opinion for Nostrum Oil & Gas PLC [LON:NOG], formerly Zhaikmunai L.P. The independent oil and gas exploration company is based in Kazakhstan, headquartered in the Netherlands, and has been listed on the London Stock Exchange since 2008.
A disclaimer of opinion is issued when the auditor is “unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.”
In Nostrum’s case, the disclaimer of opinion was due to EY’s inability to substantiate management’s assumptions regarding the company’s ability to continue as a going concern.
“[W]e were unable to obtain sufficient appropriate audit evidence to support the assumption that a restructuring of the Group’s bonds, including the deferral of associated interest due in the going concern period, is achievable in the necessary timeframe to provide a basis for us to issue an audit opinion on these financial statements.”– Ernst & Young LLP (UK) 30 April 2020
The Company is engaging an advisor to negotiate the restructuring of its debt. However, at the time the annual report was published, the uncertainty of the outcome of these negotiations was the key factor in EY’s inability to provide an opinion on the financial statements.
Until it can be proven that the negotiations have been successful, EY cannot confirm management’s assumption that the financial statements should have been prepared on the going concern basis.
In addition to bond restructuring issues, EY notes that management’s oil price assumptions are much higher than the current market’s in their cash flow forecast.
“The prices assumed in management’s base case are significantly above current market prices.”– Ernst & Young LLP (UK) 30 April 2020
Management based its forecasts on US$45/bbl which is US$15/bbl over the current market price. The assumption that prices will rise in the going concern period is as yet unclear, further adding to EY’s inability to obtain sufficient audit evidence to give an unqualified opinion as they had in every year since the company’s incorporation.
Nostrum is the most recent oil and gas exploratory company on the Main Market of the London Stock Exchange to publish its 2019 report. Nostrum’s price assumptions are generally consistent with industry peers. Three weeks prior, on 8 April, EnQuest PLC, stated an assumption of US$45/bbl through 2021 and US$60/bbl long-term.
Nostrum’s management has acknowledged that if prices remain below their forecast assumptions, the company would not be able to cover its operating expenses.
“Without mitigating actions, a sustained period of low oil prices at US$30/bbl would result in the Group being unable to cover its cash operating and interest costs in 2021.”– Nostrum Oil & Gas PLC 2019 Annual Report
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