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Premier between a rock and a happy place

Other than one multibillion-dollar hurdle, the investment case for Premier Oil is strong
March 8, 2018

Despite a $171m (£123m) post-tax impairment charge, and a 53 per cent decline in its net asset value per share, Premier Oil’s (PMO) full-year numbers offer reasons for hope. Average daily production increased to 75,000 barrels of oil-equivalent (boepd), and could rise to 85,000 boepd in 2018, as Catcher ramps up. Elsewhere, the Tolmount gas project is nearing sanction, the Zama discovery is set for appraisal, a final investment decision on Sea Lion is coming, and free cash flow is growing.

IC TIP: Hold at 72p

This outlook was all evidence, according to analysts at Jefferies, that “assets drive stocks”. So do liabilities. In 2017, the cost of servicing $3bn-worth of debt reached $329m, even before an $84m “substantial modification” refinancing charge. Consequently, Premier only hit positive free cash flow thanks to the $200m disposal of Wytch Farm. Jefferies guided its clients away from a “backward looking” overestimation of the deleveraging task, and towards the cash generation promised by Catcher, which could hit 60,000 bopd peak output next month.

Then again, RBC’s forecast for net debt to reduce to $2.25bn this year – also Peel Hunt’s mid-range estimate – is less impressive given it includes $206m from January’s early bond conversion. Although dilutive to equity investors, this has at least removed a big hedged short position in the shares, and a source of confusion in capital markets.

Peel Hunt expects adjusted pre-tax profits of $169m and EPS of 17.7¢ this year, versus losses of $293m and 56¢ in 2017.

PREMIER OIL (PMO)   
ORD PRICE:72pMARKET VALUE:£551m
TOUCH:71.5-72p12-MONTH HIGH:104pLOW: 43p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:80¢*NET DEBT:$2.7bn
Year to 31 DecTurnover ($bn)   Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20131.5028544.25.0
20141.63-363-43.3nil
20151.07-830-210nil
20160.94-41421.3nil
20171.04-366-52.6nil
% change+11---
Ex-div:na   
Payment:na   
£1=$1.39  *Includes intangible assets of $1.3bn, or 170¢ a share