Few UK shares dived more yesterday than Premier Oil, but this was one 60% price collapse that merited it.
Premier has the thick end of £2 billion of debt, yet had persuaded bondholders and shareholders to allow it to buy a bunch of ageing oil and gasfields in the North Sea. The deal was to be funded by $500 million of new equity.
It looked wobbly from the get-go. Premier’s biggest creditor feared the company was taking on huge liabilities for decommissioning old wells and had an overly rosy view of energy prices. The lender, a hedge fund called ARCM, was worried it wouldn’t get its loan back and threw a legal monkey wrench into the deal, delaying it through the courts.
Well, phew.
With oil now at $35 a barrel, investors would have been in tears if they’d just plunged half a billion into Premier. Particularly for a deal priced on assumptions of $60-a-barrel-plus.
So, what now? The rights issue is surely dead (although Premier won’t admit it yet). Management has to get ARCM back around the table, along with other creditors, and work out a major restructure.
It won’t be pretty for shareholders.
Questions are also being asked of Tullow Oil, another former stock market darling held back by vast debts. Some are suggesting its former chairman Aidan Heavey, flush with private equity cash from Carlyle Group, might come knocking now the shares are a third cheaper than last week.
The debt is a $2.8 billion hurdle to overcome, but sometimes it’s in times of market stress that difficult deals can get done.
