ii view: Premier Oil pushes production estimates higher

This oil company remains upbeat with debt reduction ongoing. 

Trading and operations update for the 10 months to 31 October 2019

• Production averaged 79.4 thousand barrels of oil equivalent per day (kboepd)
• Forecast full-year production at upper end of 75-80 kboepd guidance
• Net debt reduced by $300 million to $2.03 billion as at 31 October

Chief executive Tony Durrant said:

"We continue to deliver on our strategic priorities. We are generating significant free cash flow, which is materially deleveraging our balance sheet. At the same time, we are actively managing our portfolio and selectively progressing growth projects at the right exposure. We also continue to create value through the drill bit and to build material new positions in emerging exploration plays at low cost."

ii round-up:

Premier Oil's (LSE:PMO) production portfolio is concentrated in two main geographical areas: the UK Continental Shelf and South East Asia (Indonesia and Vietnam).

In 2018, the UK accounted for two-thirds of group revenue, Vietnam nearly one-fifth and Indonesia most of the rest. 

In its latest update, Premier outlined expectation for full-year production to hit the top end of its 75-80 kboepd range, pushed along by its North Sea Catcher field. 

UK assets averaged 55.3 kboepd, a 27% increase on the prior corresponding period driven by a full contribution from Catcher.

Tolmount, its next UK growth project, remains on schedule for its first gas by the end of 2020, adding a net 20-25 kboepd to group production. 

Group net debt fell by $300 million to $2.03 billion, supporting a full-year target in excess of $300 million. 

The share price rose by more than 2% in early UK market trading. 

ii view:

Oil exploration and production is a highly volatile business. As such, generally only investors with a medium to high appetite for risk should consider investing in the sector. As for Premier, unlike some rivals, it currently pays no dividend, so investors are reliant on gains in the share price. 

However, progress is being made. Unlike Tullow Oil (LSE:TLW) previously, production guidance was raised. Premier operates most of its assets, which provides it with strong control over future expenditure programmes and the ability to adjust discretionary spending in the event of a downturn in commodity prices. 

On a forecast single digit forward price/earnings (PE) ratio less than rivals such as Cairn Energy (LSE:CNE) and Tullow, the valuation looks undemanding. But the company's need to reduce debt remains worthy of consideration.

Positives: 

• Full-year production guidance increased
• Net debt further reduced

Negatives:

• Production for both Indonesia and Vietnam fell over the period
• Factors outside of management control such as the weather can hinder performance

The average rating of stock market analysts:

Buy