Shares in Premier Oil (PMO) have underperformed the FTSE All-Share by almost 25 per cent over the last year, reflecting not only the comparative fall in valuations for UK producers over the period, but also specific issues linked to project delays and subsequent investor anxieties over production guidance. However, the markdown has been unduly severe and the positive boost to sentiment from the near-term government sanctioning of its Catcher (North Sea) development and initial production from the Rochelle field in the North Sea could provide the catalyst the shares need.
- Near-term sanction for Catcher
- Contingent resources undervalued
- Track record of building value
- Probable technical support bounce
- Worries over 2013 guidance
- Delays to repairs at Huntington
Premier's shares are currently hovering around a major support level at 320p and look oversold based on their relative strength index (RSI). The previous two times the share price has fallen below 330p - as it did at the end of September - in the last two years, it has promptly bounced back to over 400p within three months.
The fact that a company like Premier, with such a long track record of building value, is temporarily out of favour opens up a buying opportunity for investors who are willing to look beyond its current technical difficulties. After all, Premier is certainly performing well by most standards. It expects to boost production by 9 per cent this year and first half cash generation was strong while pre-tax profits set a new record of $215m (£133m).
And unlike some others producers, the concerns over the company's ability to meet full-year guidance are not linked to the natural decline of its producing assets, but rather a prolonged gas-venting problem at the Huntington oilfield in the North Sea, in which Premier holds a 40 per cent stake. The field only moved into production in April, but aside from the gas-venting issue, the early indicators are that the ramp-up towards a plateau production target of 25,000 barrels of oil per day (bopd) is realistic.
Premier produced 58,600 bopd during the first six months of 2013, which due to Huntington, was adrift of the original median target and - full-year target has been reduced from 65,000-70,000 bopd to 63,000 bopd, although that's dependent on a speedy resolution to the technical issues. But even though this revised target remains open to question, there is no shortage of potential near-term share-price catalysts.
In addition to Catcher and Rochelle, Premier's Dua, Solan, Anoa Phase 4, Pelikan and Naga projects remain on track for first oil/gas in 2013/2014, and there are high hopes for the Singa Lut and Kuda Laut prospects in Indonesia. The 2013 exploration programme, much of which will be finalised over the current quarter, is potentially worth up to 152p on an unrisked basis, according to citi research.
| PREMIER OIL (PMO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 330p | MARKET VALUE: | £1.7bn | |
| TOUCH: | 329p-330p | 12-MONTH HIGH: | 405p | LOW: 314p |
| FWD DIVIDEND YIELD: | 1.5% | FWD PE RATIO: | 10 | |
| NET ASSET VALUE: | 391¢† | NET DEBT: | 64% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢ ) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 0.76 | 101 | 28.0 | nil |
| 2011 | 0.83 | 142 | 36.6 | nil |
| 2012 | 1.41 | 360 | 47.9 | 5.0 |
| 2013* | 1.68 | 423 | 52.2 | 5.1 |
| 2014* | 1.96 | 426 | 52.7 | 5.1 |
| % change | +17 | +1 | +1 | - |
Normal market size: 5,000 Matched bargain trading Beta: 1.00 *Canaccord estimates †Includes intangible assets of $922m, or 174¢ a share £1=$1.62 | ||||
The market was also disappointed by news at the half-year mark that sanctioning for the off-shore Falkland Island Sea Lion discovery, in which Premier holds 60 per cent, had been moved back to the fourth quarter of 2014. The estimated date for first oil production has slipped from 2017 to 2018, while supplementary engineering studies are also adding to costs. One of our readers recently suggested that Premier's involvement in the Falklands might act as a "poison pill" as far as some investors were concerned, but given that Sea Lion is now expected to deliver up to 394m barrels of oil it's understandable why Premier would be willing to take on the inherent risk - both political and operational.
In fact, Citi intends to increase its core valuation for Premier of 335p a share by another 140p on sanction of both Sea Lion and Catcher. Premier's commitment to the North Falkland Basin was cemented earlier this month, when, along with its partner in the Sea Lion venture Rockhopper Exploration (RKH), it farmed-in to the adjacent Isobel/Elaine and Jayne East prospects that will be under the auspice of the newly proposed Desire/FOGL entity.
