ii view: Why Premier Oil just soared 78%

Management offers investors some reassurance after the shares suffer the full force of the corona crash. 

ii round-up:

Oil and gas company Premier Oil (LSE:PMO) today issued a trading update following highly volatile trading in its shares. 

Against a backdrop of plunging oil prices as coronavirus reduces travel demand and Saudi Arabia and Russia embark on a price war, Premier's share price has fallen by more than 70% in the last week.

Premier, who in January agreed to buy $900 million (over £600 million) in UK North Sea assets from both BP (LSE:BP.) and Dana Petroleum, announced that 30% of its 2020 oil and gas production is hedged at an average oil equivalent price of $60/bbl.

Premier shares, having previously closed at less than 15p, rose by as much as 78% to above 23p in morning UK trading. 

It also outlined unrestricted cash of $135 million (£105 million) and undrawn facilities of $330 million (£257 million) as of the end of February and a 2020 cash flow breakeven price of under $50/bbl. 

Group debt at its full-year 2019 results stood at just under $2 billion ($1.56 billion). 

Investors have been deeply concerned that Premier is trying to balance a $2.9 billion (£2.26 billion) refinancing - including its pending acquisitions - during an oil price slump. 

Some investors have been calling for the company to abandon the North Sea purchases, concerned that the group could run out of money. 

A court hearing to sanction its creditor schemes of arrangement is due to commence on 17 March. Management will provide an update on the next steps in the process once the sanction hearing has taken place.

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, operating most of its own assets gives it control over future expenditure programmes and the ability to adjust discretionary spending. Management is now looking to reduce its 2020 capital expenditure, with a current estimate of $100 million flagged. 

Assuming such a spending reduction and a $35/bbl oil price for the remainder of the year, Premier would expect to be broadly cash flow neutral in 2020.

For investors, a perfect storm of acquisitions, debt and a falling oil price has left long-term shareholders nursing painful losses. Despite today’s share price gain, only high-risk speculative investors should even contemplate investing Premier. 

Positives: 

• 30% of entitlement production is hedged
• Production guidance has been reiterated

Negatives:

• Group debt still needs to be reduced
• Production for both Indonesia and Vietnam fell during 2019

The average rating of stock market analysts:

Buy