Last week Premier Oil (LSE: PMO) fell over 30% on no news. Rumours were flying around of a rights issue and subsequent dilution — this scared equity holders, and its shares were in freefall. Premier is down over 87% in a year, falling from highs of 184p to the current 19p. Although most investors are staying away from commodities, this opportunity could be too good to ignore.
Last week Premier Oil announces the acquisition of E.ON’s UK assets for $120m. The portfolio is producing around 15,000 boepd and has 64 mmboe of reserves and resources. The deal will be funded by existing cash flow, and will be paid back in around 2 years. To me this looks like a very smart deal from Premier, and one that will enhance the company’s UK business hugely at little cost.
An encouraging piece of information to note is the competition for the assets. Premier CEO Tony Durrant stated that there were multiple parties interested in the assets, but Premier came out as the winner as management wanted the whole portfolio. This to me is a great sign, as it shows that there are multiple parties out there that are looking for assets and deals in the North Sea. This is the perfect time in the cycle to be acquiring assets, and this deal may kick-start a major year of mergers and acquisitions across the industry.
Importantly for Premier, this acquisition is ‘covenant accretive’, which gives Premier more flexibility with its debt in the future. As I have mentioned, the deal will be funded from Premier’s existing cash resources and has an expected payback time of around two years.
Tony Durrant also stated that the company has had its eye on these assets for some time. He further added that this deal would have taken place regardless of Premier’s balance sheet or commodity price. This again is positive. Premier has picked these assets up for around $1.9/boe, which is very cheap, and multiples less than Premier would have had to pay 18 months ago. The assets also come with an attractive hedging programme through 2016 and 2017, too.
The shares are currently suspended due to the transaction being classified as a reverse takeover. The company is in talks with the UKLA, and I expect shares to be ‘un-suspended’ sooner rather than later. When the shares begin trading, I think it will open significantly higher than the current 19p.
Premier looks okay to stay within banking covenants through 2016 and into 2017, as the company currently has $1.2bn of headroom. Production in the Solan field this year will be key in boosting cash flows and to allow the company to keep debt facilities in place. I have highlighted before how crucial Solan is, and the company updated the market last week stating first oil is now expected to be in February. Last week also saw an upgrade to the Sea Lion discovery in the Falklands, which was very good news and should help Premier in the future.
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Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.