It’s been a superb week for investors in Premier Oil (LSE: PMO). That’s because its shares have soared by around 30% during the period and while this level of performance may not be repeated in the next week, it could mark the start of a new beginning for the company.
Clearly, Premier Oil’s future is highly dependent on the price of oil and on this front there’s a great amount of uncertainty. On the one hand a deal to reduce oil production between major producers such as Saudi Arabia, Russia and Venezuela could be struck, but clearly there are no guarantees on this front. Likewise, the economics of an oil price of around $30 per barrel could begin to bite and send a number of producers into bankruptcy, while reduced exploration and investment spend also have the potential to reduce the supply of oil over the medium-to-long term.
Similarly, demand for oil could increase over the long run. Global energy demand is set to gradually rise in the coming years as the emerging world continues to develop. And while in the developed world, oil is increasingly being substituted for renewable forms of energy, fossil fuels are likely to remain a key part of the energy mix in countries such as China and India in the next few decades.
New strategy
Despite the uncertainty regarding the price of oil, Premier Oil has the potential to continue to deliver excellent capital growth. A key reason for this is improving investor sentiment in the company, with its new strategy seemingly resonating well with investors. This includes a goal of becoming increasingly efficient and reducing the company’s cost base so as to make it more competitive versus its rivals, with non-core assets also being disposed of.
And with Premier Oil also taking advantage of discounted asset prices within the resources space via its purchase of EON’s North Sea assets, it appears to be positioning itself to take advantage of any upturn in the oil industry.
With Premier Oil expected to move from lossmaking territory to a black bottom line in the current year, investor sentiment could continue to improve moving forward. That’s especially the case since the company’s shares trade on a forward price-to-earnings (P/E) ratio of 11.5, which indicates that there’s significant upward rerating potential on offer. And with Premier Oil having a price-to-book (P/B) ratio of just 0.3, it appears to offer a relatively appealing risk/reward ratio even when the prospect of additional asset impairments are taken into account.
Of course, Premier Oil’s recent improved share price performance could prove to be a flash in the pan and it could return to a downward spiral. However, with a sound strategy, low valuation and the prospect of a rising oil price in the long run, it seems to be of interest to less risk-averse investors.
