Premier Oil’s share price has been on the slide for weeks, hit by the drop in crude prices, but it is showing signs of recovery after a positive update.
The company, which has operations ranging from Indonesia to the Falklands said its daily production rate was running ahead of its annual guidance after it completed maintenance over the summer. It said its production averaged 57,100 barrels a day, up from the forecast 55,000. Its Solan project in the north sea is due to start production in the fourth quarter of this year, which could boost output further.
Premier, which has $2bn of net debt, recently renegotiated agreements with banks and bondholders, part of which meant it would not pay dividends for two years. Its latest update assuaged fears of a possible rights issue, said analysts. Stifel’s Dragan Trajkov said:
This morning’s operational update appears to be an effort to reassure investors after the recent share price slide. While most of the updates are not news in our view, the one that may draw the most attention is the liquidity position of the company. Given that we do not anticipate a liquidity crunch in near future, we don’t see an immediate need for the company to do a rights issue. We wonder if today’s release was intended to send that message to investors; however, the company stopped short of specifically mentioning either way.
Separately Barclays issued an overweight recommendation on the business:
There is no doubt that Premier Oil’s investment case and business model is challenged in a scenario where oil prices remain lower for longer, but equally its stock price looks poised to benefit from even a modest recovery in sentiment.
We would suggest the 33% fall in the stock since the company’s first half 2015 results in late August is a result of its substantial oil price leverage and possibly just a $5 a barrel shift in investor’s long-term oil price outlook – at 111.5p on 20 September 2015 the stock was discounting $71 a barrel versus a peer group average of $67 a barrel; today we calculate the stock is reflecting a long-term Brent price of $66 a barrel versus a peer group average of $64 a barrel.
We recognise predicting a change in sentiment towards a modest recovery in oil prices remains hazardous, but for Premier it is worth noting that continued operational progress, favourable debt structures and limited capital commitments give management the time to navigate a prolonged downturn. Although perhaps not an investment case likely to generate excitement, we believe waiting for an environment where stocks reflect $70 plus a barrel long-term rather than around $65 a barrell could be enough to drive a material recovery in Premier’s valuation.
After the update Premier is up 5.5p or nearly 9% to 69.10p.
