Production Growth in Uzbek Gas Fields Signals Strong 2025 Outlook

Report Highlights

• We were pleased to see production remain flat QoQ, especially since the wells have a natural annual decline rate of over 20%. Flat production indicates that the company’s techniques are proving effective.
• As a result of a multi-well workover campaign in Q3, current production is up 7% from the Q3 average. Consequently, we are raising our 2024 revenue and production estimates.
• There were no material updates on the company’s other initiatives, including the development of a Liquefied Natural Gas (LNG) project, and lithium exploration, in Kazakhstan
• Uzbekistan's natural gas pricing is regulated by the government. This provides a stable price environment for CDR, which we view as a major advantage given the volatility risk in commodity prices for typical oil and gas producers.
• We anticipate record revenue, and EPS, in 2024 and 2025. Key upcoming catalysts include progress updates on the LNG project in Kazakhstan, and efforts to boost gas production in Uzbekistan.

Price Performance (1-year)

Financials (Year-End: Dec 31st) 

We are not making YoY comparisons, as current production comes from the company's Production Enhancement Contract (PEC) with the Government of Uzbekistan, whereas historical production came from its now-depleted gas fields in Turkey.

In Q3, production remained steady at approximately 60,000 mcf/d, as we expected. Revenue and operating netback remained relatively flat as well 

However, EBITDA declined 4% QoQ due to higher G&A expenses, missing our estimate by 2%. EPS improved QoQ due to significant non-recurring cash expenses in Q2, but came in 5% below our estimate .Free cash flows turned positive in 2024 (9M)

Although debt/capital is currently higher than the sector average, we anticipate it will drop below the average by 2025, driven by robust free cash flows. Can raise up to $5M from in-the-money options and warrants 

Company Updates 

The company is focused on three main initiatives: 1) Uzbek Gas: Redeveloping natural gas projects in Uzbekistan, 2) Modular LNG: Developing Central Asia’s first LNG facility in Kazakhstan, and 3) Lithium Brine Exploration: Investigating lithium brine resources in Kazakhstan.

In early 2024, CDR obtained rights to gas fields in Uzbekistan, and transformed into a significant gas producer. The company is also actively developing an LNG project, and conducting lithium exploration in Kazakhstan

Development Plans: Uzbek Gas - Through a combination of workovers, and new wells, the company aims to boost production to over 100,000 mcf/day across 120 wells (total CAPEX - $80M+). In 2025, the company plans to drill a vertical, horizontal, and multi-lateral well. If successful, this could yield 8,000+ mcf/d of new production.

Development Plans: Kazhak LNG - The company is planning to develop a series of modular LNG facilities in four phases. When fully operational, these facilities will produce up to 600k tonnes of LNG annually, displacing 680k tonnes of diesel fuel. The first phase of the project is expected to produce 120k tonnes per year (CAPEX: US$80M), which is the energy equivalent volume of 440k litres of diesel per day (161M litres per year). This facility is scheduled to start operations in 2026. 

Development Plans: Kazak Lithium - CDR is planning to drill two exploratory wells. We note that delineating a lithium resource is a faster and cheaper process vs mainstream metals such as gold and copper. Management is also working to secure a second lithium brine license in a region where a historic well revealed mineralization of up to 130 mg/L Li, and identified over 1 km of lithium brine sands.

Multiple upcoming catalysts

FRC Projections and Valuation

With current production up 7% from the Q3 average, we are raising our 2024 production and revenue estimates, while lowering our EPS estimate due to higher-than-expected G&A expenses in Q3. We are not making any changes to our long-term (2025+) production, and cash flow estimates, for the company’s gas projects in Uzbekistan

We are also maintaining our forecasts for the company’s LNG initiative. Our overall valuation declined slightly from $3.62 to $3.59/share due to our lower 2024/2025 EBITDA estimates

We are reiterating our BUY rating, and adjusting our fair value estimate from $3.62 to $3.59/share. Although CDR is up 28% since our initiating report, we believe the market has yet to recognize the potential of CDR’s LNG initiative. The company has demonstrated production growth at its Uzbek gas field, but we believe the market needs to see more significant growth to fully appreciate the project's potential. Once the market gains clarity on these factors, we expect shares to move closer to our fair value estimate.

Risks

We are maintaining our risk rating of 4 (Speculative)

We believe the company is exposed to the following key risks (not exhaustive):

• None of its projects have resource or reserve estimates
• No guarantee that agreements with government entities in Uzbekistan and Kazakhstan will be extended
• The Uzbek government is considering liberalizing the energy sector, and implementing market-based pricing; market liberalization may lead to volatility in gas prices 
• FOREX and interest rate fluctuations
• Project financing and potential delays in development
• No guarantee that the company will be able to expand its projects simultaneously

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