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Premier Oil (PMO)
Share of the Week: Premier Oil is world-class
By David Brenchley | Fri, 14th July 2017 - 16:33
It's been a tough hold for long-term investors in oil companies, including Premier Oil (PMO). From a peak at 535p in February 2011 to a trough of 19p in early 2016, the UK-to-Mauritania-focused oil explorer lost 96% of its value. It's down 87% since the oil price crash of 2014 from over $100 per barrel to under $40 due to oversupply.
However, according to David Round, an analyst at BMO Capital Markets, "things are starting to look rosey". A "significant" discovery offshore Mexico announced Wednesday saw the share price surge 39% to 64.75p, the highest since late April.
The Zama-1 well, the first offshore exploration well ever drilled by the private sector in Mexico, could produce over 1 billion barrels of oil, we hear. It's one of the ten largest offshore oil discoveries made in the last five years and Premier owns a 25% interest in this "world-class" asset.
Premier followed that news with a "positive" half-year trading update, noting that production is ahead of guidance and up 35% year-on-year. Revenue of $560 million (£431 million) is in line with expectations, while net debt has been reduced to $2.7 billion, a still-colossal but less than expected.
Meanwhile, its Catcher field in the North Sea should produce first oil later this year; and the Tolmount development in the UK Southern Gas Basin is progressing well. These will be a huge help in accelerating deleveraging efforts.
Chief executive Tony Durrant is in confident mood. "Our substantial undeveloped resource base, now enhanced by the Mexican discovery, provides Premier with significant growth opportunities," he says.
Premier almost hit a quid early in the year, so it's still well down. But what are the odds of a return to that 100p level?
BMO says the rise in the stock now only puts it in line with its target price, so it remains 'neutral'. However, the broker now has "increased confidence in management's ability to add value to the story".
Stephane Foucaud at GMP FirstEnergy sticks a 'speculative buy' on the stock with a target of 90p. "The shares continue to offer a leverage play on the oil price," he reckons.
Premier shares have weakened by around 4% since 'Wonderful Wednesday', and this week's 30% surge needs to be put this in context - we're only back to April prices. And net debt reins in enthusiasm from the team at Barclays.
"While the asset may become company-defining in time, we believe the H2 investment case is still focused on positioning Premier to accelerate debt reduction," write Barclays' oil analysts.
"Operating performance remains strong across the portfolio, with management holding back on raising 2017e production guidance despite running 9% ahead of its 75,000 barrels per day target."
Barclays still rates Premier shares 'equal-weight', although factoring in the risked 15p for the initial success at Zama increases its price target to 72p from 57p.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
|Bid / Ask||93.7 / 94.05|
|Day Range||93 / 97.6|
|52Week Range||42.75 / 104.00|
|Last Update: 18:44:19 (24/01/18)|