Why I’m sticking with the Premier Oil share price for 2019

I reckon the Premier Oil plc (LON: PMO) share price is set to make strides in 2019, and I’m holding.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you want a barometer of the oil price, you don’t need to look much further than Premier Oil (LSE: PMO) shares.

In the past few months as oil has declined from over $85 per barrel to under $60, a fall of 30%, the Premier Oil share price has fallen by 50% over the same period.

Its shares are, clearly, geared up from the oil price. That’s to say, a rise in the oil price is likely to result in a bigger percentage rise in the Premier price, while a fall is likely to result in a bigger percentage share price fall.

Debt

Considering Premier’s high debt levels, that’s entirely to be expected, and it’s partly why I bought some Premier Oil shares in late 2015 at 99p. I was convinced the oil price was way below any sustainable long-term level and that (what I saw as) the inevitable long-term recovery would gear up my investment in Premier shares.

As is so often the case, my timing was awful, and with the shares now trading at 71p, I’m sitting on a 28% loss. But timing aside, I think my underlying reasoning was sound and that it will produce a profit in the long term.

I was pinning my evaluation on a long-term oil price of around $75 per barrel, and I still think that’s a reasonable expectation with a horizon of five to 10 years.

Balance sheet

But even without worrying too much about any specific oil price level, anything that leaves Premier profitable and able to pay down its debts would bring down its gearing, improve its safety and, hopefully, help firm up its share price.

As Rupert Hargreaves recently pointed out, “Premier’s sell-off has been so severe because investors are worried about the group’s borrowings — an issue the business has had for some time.”

Having said that, he added: “However, this year the group has taken serious strides towards reducing its leverage.”

The most recent step in that direction is the sale of interests in the Babbage Area to Verus Petroleum, for which Premier has received £30.3m ($38.7m) after adjustments. Verus will also “take on exploration commitments valued at c.$24m,” and the proceeds will be used to pay down Premier’s existing debt.

Production update

We had a production update at the same time, and Premier “continues to forecast full-year production of around 80 kboepd.” The firm has, apparently, “hedged over 30% of its 2019 forecast oil entitlement production at an average price of $70/bbl,” and that looks like it was a canny move, to me.

Premier Oil is still a risky investment, certainly, but the company is way past the worst of its crisis and is focusing on reducing its debt mountain. If it survived $30 oil, I see it as well-placed to progress from $60 oil.

And the more the company’s gearing falls, the more I see positive sentiment returning. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »