Shareholders in Premier Oil (PMO) voted with their feet this week, after a report in The Sunday Times said the heavily-indebted explorer-producer was preparing to tap equity investors to fund a bid for Chevron's North Sea assets.
The company's immediate response did little to assuage fears of a dilutive rights issue, and failed to halt a 10 per cent drop in Premier’s share price. In a statement on Monday, the FTSE 350 oiler did not rule out a potential bid, but said it will "continue to look at opportunities to acquire UK North Sea assets in line with the group's stated strategy”.
However, the group said there could be no guarantee it would take part in any auction, and denied a “firm decision” had been taken to bid for “all or any of the assets currently being marketed by Chevron", or with a view to how any such acquisition might be financed.
Should it want to bid, investors could be on the hook for a great deal of cash. The Sunday Times reported the Chevron fields are on the market for around $1.5bn (£1.17bn), and Premier faces rival bids from fellow North Sea players Ineos, Chrysaor and Delek – a trio that Panmure Gordon analyst Colin Smith described as “financially stronger competitors”. The report also suggested Premier might fund the deal by selling all or part of its Latin American business, which includes its stake in the highly prized Zama discovery offshore Mexico.
Investors have good reason to suspect a rights issue might not come cheap. For a start, with Brent crude stuck below $60 a barrel, bullish sentiment towards oil prices is in short supply. And while Premier says it can generate positive free cash flow above $45 a barrel Brent crude, the legacy of the last major downturn in oil prices casts a long shadow over the group’s balance sheet.
As such, a major transaction would signal a departure from the group’s deleveraging plans. In 2018, a 7 per cent rise in year-on-year production helped Premier reduce its net debt by $390m to $2.33bn, ahead of guidance. However, that decline benefited from $75m of asset disposals, and the $180m reduction in accounting net debt from the early conversion of bonds, which was dilutive to equity holders.
Premier’s leverage also means its shares remain highly geared to movements in the oil price. What’s more, its existing business is hardly short of competition for cash; in 2019, capital expenditure for development, exploration and abandonment is expected to reach $340m.
