It wasn’t that long ago that the market would price in a decent £500m cap ahead of a speculative and low CoS exploration well. Remember Chariot Oil and Falkland Island plays? Success was priced in weeks ahead of the drill bit even turning. Over the last year or so the opposite has been happening. Companies with proven resource / billions of barrels are priced at levels that suggests the resources will never make their way to commercial markets. That said there are a handful of companies out there whereby the market seems to be more willing to listen. Sound Energy is a good example. Not a bubble of gas or condensate produced, in a risky MENA region and Sales still some way off. Market cap £535m+. Another is SOLG, a miner drilling for resources in Ecuador. No sales and very much early stages – Market Cap £550m. The list goes on.
So what’s the problem with Premier Oil? When will the penny drop? Lets take a quick look at what’s under the bonnet.
1. As at 31 December 2016 PMO had total 2P reserves and 2C resources of 835 mmboe (excludes ZAMA-1). The 700 mmboe represents our discovered but undeveloped 2P reserves and 2C resources (ie excludes reserves associated with producing assets) and relates to projects such as Catcher and Tolmount in the UK, Tuna in Indonesia and Sea Lion in the Falkland Islands.
2. In July, the company discovered the 5th biggest discovery anywhere in the world in the last five years… ZAMA-1. Tony Durrant, Premier Oil’s chief executive, said the discovery, which suggests the presence of more than one billion barrels of oil, “adds materially to Premier’s portfolio of assets worldwide”. Mark Wilson, an analyst at Jefferies, said the announcement about the discovery “appears about as material as we could possibly imagine at this early stage”. Stephane Foucaud, at GMP FirstEnergy, said the size of discovery was well ahead of estimates and there were several “very encouraging” signs, including that it is light oil and the reservoir is of good quality. Light oil is considered preferable to denser heavy oil as it is easier to process. However Mr Foucaud added: “There is no question that one needs to be cautious until the well has been tested.”
3. Production of circa 75,000 to 80,000 boepd.
4. After spending billions on Catcher, first oil is expected by year end boosting production further with numbers in 2018 expected to top 100kboepd.
5. Wytch Farm Sale circa £200m for PMO’s 15mmboe Reserves. (At last a valuation marker! … Take note and then look at the remaining 1 Billion+ in resources).
6. Net Debt of circa £2.5bln (after recent asset sales).
7. Convertible bond (circa 260million shares) set at 74.71p
8. Current share price 66.25p. Market cap of £340m.
They say if you drop a penny from a very tall building it can kill someone. Not a pleasant thought but the point is when the penny finally drops on investors, PMO will be in demand. A rerating is inevitable assuming PoO sustains levels of $55pb to $65pb range. The production and cash flows are vital to ensure debt is repaid but as proven by PMO of late, they are willing to sell off ageing assets to chop off wedges of debt in a faster and more accretive manner. There are many other assets in folio that can be sold off or farmed out. Sealion is one and of course, the recent ZAMA-1 success is another although a couple or more wells on that world class licence will be required to get a decent price. That’s planned for 2018. Exciting stuff.
In summary (and it is a quick review) PMO have assets in the folio which if in another listed companies hands would enjoy a £500m or £600m market cap per asset and that’s cheap. Perhaps PMO should spin them off? If only! Unfortunately, the debt pile is the cloud that hangs over this company. But assuming Catcher delivers production in late 2017 and ramps up in 2018, PMO’s debt will begin to drop fast with PoO in the mid to late $50’s. Perhaps the markets reluctance to rerate the stock is based on past failures like Solan? Perhaps the market just wants to see Catcher producing and debt reducing before it finally agrees the rerate is warranted? But lets get real here for a moment… the company has production levels higher than Tullow. It has prime assets like Sealion and Zama (not to mention Tolmount). It’s assets are by large in secure regions with no significant threats. The debt is reneg’d.
What’s not to like?
Key event remaining this year is the all important Catcher development. The Floating, Production, Storage and Offloading (FPSO) vessel for the Catcher field (“BW Catcher”) left deep water anchorage off the coast of Singapore and is on route to the North Sea. Expected arrival 14th October 2017. Good news on this development over the next few weeks/months should be greeted with a rise in the sp as key events become derisked.
Premier Oil is part of TheShareHub Top Ten picks for 2017. Current SP = 66.25p. Target price at 100p for 2017. TP of 160p for 2018.
Please leave comments/thoughts via the comment section below. It may take a short while before your comments appear via the administrator system.
As with all stocks, please do thorough research and please read the risk warning section here.