ii view: Premier Oil underlines high operating efficiency

Premier Oil reports increased production and lower costs. Debt reduction is also on track.

First-half trading and operations update

• First-half production up 11% from last year
• On track to meet previously increased annual production guidance
• Free cash flow generation of $180 million, reducing net debt to $2.15 billion
• Full-year operating costs of $12 per barrel of oil equivalent (BOE), reduced from $13/boe

Chief executive Tony Durrant Chief Executive said:

"We have delivered a strong first half. I am particularly pleased with the continued high operating efficiency from our producing portfolio which has enabled us to reduce our debt by $180 million.  This puts us in good stead to meet our debt reduction target for the full year, which remains a top priority for the group.  In addition, we have retained significant optionality with our future developments and an extremely attractive exploration portfolio which together offer substantial upside exposure."

ii round-up:

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

Singapore demand for its Indonesian gas has remained robust. Production from UK assets, which represent over half the group's production, grew materially during 2018.

Its largest pre-development project is the fully appraised Sea Lion field which, at over 220 million barrels of oil equivalent (mmboe) gross of resources in Phase 1 alone, represents a material opportunity for Premier.  

Group production for the first half averaged 84.1 thousand barrels of oil equivalent per day (kboepd), ahead of budget and underpinned by very high operating efficiency. Management is confident it will achieve full-year production guidance, increased in May to 75-80 kboepd. Operating costs have also been trimmed, down a dollar to $12/boe.

UK assets contributed 57.7 kboepd, a 40% increase on the first half of 2018. The Chim Sao field in Vietnam delivered 12.4 kboepd, Indonesia, Natuna Sea Block A averaged 11.5 kboepd and Pakistan 2.5 kboepd.

Management continues to expect first gas from the Bison, Iguana and Gajah Puteri fields in Indonesia by year-end. In the UK Southern North Sea, drilling of the Tolmount East appraisal well, which has the potential to add significantly to the Tolmount resource, will begin soon. 

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. 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 price earnings (PE) ratio of around half the 10-year average, the valuation is undemanding. But the company's need to reduce debt also warrants consideration.   

Positives: 

• Production is increasing
• Still happy with more aggressive output targets
• Net debt cut from $2.33 billion at end-2018 to $2.15 billion

Negatives:

• Vietnam production fell to 12.4 kboepd from 16.2 in H1 2018
• Net debt still too high
• Exposure to factors outside of its control like the weather is a performance risk

The average rating of stock market analysts:

Buy