Premier Oil (PMO) has always been highly geared towards movements in the oil price, so it is hardly surprising that its share price has been dropping recently. But I would seriously question whether the halving of the share price is really justified, as that has wiped around £600 million off the value of the company from its peak of 147p at the start of October. Yes, the oil price has fallen sharply, and that will of course be a concern for producers, but the way that the shares have dropped is more indicative of expectations of further collapses to come.
I certainly don’t think that we are anywhere near that stage yet and can’t see OPEC allowing prices to totally collapse, whatever rhetoric may be coming from Donald Trump about wanting lower oil prices – I find it hard to see how that is going to help all the US shale producers either, and many of those have substantial debts that they need to service. So, I’m definitely not at the stage where I’m thinking it is time to get out of oil as I see this as more of a temporary blip or correction, rather than being the start of another crash, and based on that it is a buying opportunity, especially if you managed to derisk any of your oil investments anywhere near the recent peak.
On paper one of the biggest reasons to avoid Premier is the high level of debt that it has, having invested a lot in getting several fields up and running in recent years, and that still stands at over $2.5 billion. But currently the company is managing to gradually reduce that and is able to keep its leverage within its debt covenants and also its guidance, so on that front I’m happy as things stand. Of course, if we were to get a sustained period of lower oil prices then once again the company would be struggling with this debt burden, but it isn’t exactly unusual to have high levels of debt in the natural resources sector due to the costs often involved with reaching initial production from an asset, with the payback coming over a long period of years after that point is reached. Operationally the company has been performing well, and the recent update showed that it is now producing 78,400boepd and is on track to hit its full year rate of 80,000boepd, thanks to its Catcher field performing well. Operating costs are also inline with expectations, at around $17/boe currently. Things seem to be on track with its development assets as well, with the Tolmount gas field progressing towards production towards the end of 2020. On the exploration front it also had success with the Zama drill in Mexico.
So, in terms of its operations, not only does it have the assets which are providing production currently, but it also has others that will come online in the future and help the company to grow. The company has also taken advantage of the higher oil prices to hedge over 30% of its 2019 production, with 3.5 million barrels at $69.1/barrel in H1, and 2.8 million barrel at $72/barrel in H2. This at least gives it some guaranteed revenue at higher oil prices, whatever the actual spot price might do during that period. Gas prices have also been showing some strength, which is good news for the company as well. Share price direction here will be pretty much dictated by where the oil price goes, but if we do see a bounce from around here, then there is the potential for a very good return from this share, given the size of the company, and I can easily see a 50% rise coming fairly quickly when oil does bounce.
Filed under: Premier Oil, FinnCap IPO, Xeros Technology, Thomas Cook, BigDish, Diageo
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