Shares in Premier Oil (LSE: PMO) have barely paused for breath this year, rising by nearly 50% in just over four months. Investors who caught the lows in January have done well, but last week’s trading statement highlighted a possible problem.
Alongside a solid operational update confirming 2016 production guidance, Premier said that discussions were “ongoing with lenders to secure financial covenant waiver if required”.
In my view, these words should be a warning flag for shareholders. If Premier needs to renegotiate the repayment terms of its debt for the second time in two years, this could be at the expense of shareholders.
A rights issue or a share placing is a possibility. Premier could also be forced to postpone investment in attractive new projects to speed up debt repayments. So the quality of Premier’s assets means that the company is safe, but shareholders may not be.
Of course, things may not get this bad. The oil price may rise by enough to allow Premier to start repaying its $2.2bn net debt in 2017 without difficulties. But in my view this is a gamble I’d rather avoid.
Surprisingly strong performance
Abu Dhabi-based Gulf Marine Services (LSE: GMS) provides self-propelled jackup barges. The firm hopes that these modern vessels will steal market share from traditional non-propelled drilling platforms, due to the savings they can provide.
Gulf has managed to keep all of its vessels busy, despite the downturn. Last week’s quarterly update reported fleet utilisation of 93%. However, this hasn’t stopped the firm’s shares from falling by 55% this year. The problem is that investors are nervous about price cuts and debt.
In March, Gulf said that margin pressures were likely to cause earnings per share to fall by 25%-30% in 2016. Consensus forecasts reflect this, showing a 33% fall to $0.16 per share. What’s interesting is that Gulf’s falling share price means that despite this downgrade, the stock now trades on a forecast P/E of just 4.4.
To me, this ultra-low P/E suggests that the market is pricing-in a much bigger fall in earnings, or problems with Gulf’s $408m net debt. Gulf may be forced to make much bigger price cuts to win new orders. I think it’s probably too soon to invest.
A more defensive choice?
Aviation and engineering firm Cobham (LSE: COB) surprised investors in April with a £500m rights issue. It wasn’t a good surprise, and the shares have fallen by nearly 25% since the announcement. However, raising cash now to prevent the risk of breaching its lending covenants looks like a sensible move to me. It should leave Cobham in a stronger position to recover.
I estimate that the rights issue will increase Cobham’s share count by about 27%, based on a share price of 160p. Current earnings forecasts don’t yet take this into account, so earnings per share estimates will probably fall after the rights issue shares start trading.
Based on current profit forecasts, I estimate Cobham may deliver adjusted earnings of about 13.5p per share this year. That’s equivalent to a forecast P/E of about 12. That seems about right to me, given the firm’s uncertain growth prospects.
I plan to wait until after the rights issue before reviewing Cobham again. I think it may still be too soon to buy.
