Why I’m not buying shares in Premier Oil plc just yet

Premier Oil plc’s (LON: PMO) turnaround is accelerating but I’m not buying yet.

| 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.

Over the past four months, the price of oil has made an impressive recovery. After hitting a low of around $44 a barrel at the end of June, rising demand coupled with limited supply has pushed prices back above $60/bbl for the first time since early 2016. 

With oil prices rising, shares of oil producers have rallied. For example, shares in Premier Oil (LSE: PMO) are up 65% since the July low. However, despite this rise, I’m not buying the shares just yet. 

Uncertain outlook 

2017 has been something of a transformational year for Premier Oil. After several years of uncertainty, the company looks as if it is finally back on track this year. Costs have been cut, the company has taken action to get its debts under control, and at the beginning of July, the firm announced that it had made a “world-classoil discovery offshore in Mexico. Higher oil prices should be the last piece of the puzzle. 

After three years of losses, City analysts expect the company to return to profit this year, with a pre-tax profit of £21.1m and earnings per share of 0.05p projected — not much, but it’s a start. 

For 2018, based on current oil price projections, the company’s pre-tax profit is expected to hit £129m and earnings per share are set to come in at 13p.

Unfortunately, these projections are down substantially from the City estimates issued earlier in the year. Only four months ago, analysts were projecting a pre-tax profit of £42m for 2017 and £209m for 2018. 

These volatile figures help explain why I remain cautious on Premier despite the company’s recent rally. The firm’s outlook is improving, that’s for sure, but there’s still a lot to do before it returns to its former glory. What’s more, oil prices may not remain elevated for long.

Higher prices have removed the need for OPEC to reduce production and the cartel might now decide that its time to increase output, which would weigh on prices. 

Plenty of work to do

As well as the uncertain outlook for oil, Premier’s debt pile is concerning. The £2.2bn debt mountain is nearly six times more than the company’s market value (£374m at the time of writing), and before investing, I’d want to see some substantial progress on debt reduction. If debt starts to decline substantially, that’s a clear message that the firm is on the right path to success. 

So overall, even though shares in Premier have rallied substantially since the middle of the year, I’m not buying just yet. 

Uncertainty continues to surround the business. Granted, oil prices have risen to a multi-year high, but at the company level there’s still plenty of work to do. The company has to prove that’s it’s making the most of the beneficial environment before it becomes an attractive investment once again. 

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. 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

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

With a spare £500 I’d buy these UK shares

A financial services giant, a FTSE 250 distributor, a FTSE 100 tech stock, and a gold miner are on the…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I buy this defensive FTSE 100 stock for growth and returns?

This Fool takes a closer look at a FTSE 100 stock to see if it could boost his holdings via…

Read more »

Young female analyst working at her desk in the office
Investing Articles

I robbed Mr Market of this cheap FTSE stock!

This FTSE 250 stock has crashed by almost 30% in six months. But I recently bought into this battered business…

Read more »

Mature people enjoying time together during road trip
Investing Articles

3 reasons I’m backing NIO shares to soar!

NIO shares have bounced up and down this year. But where will the share price go next? My bet is…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Up 300%, is the Hurricane Energy share price an opportunity too good to miss?

This Fool looks at why the Hurricane Energy share price has soared in the past 12 months. Should he buy…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

The BT share price crashes 20% in a month. Buy now?

The BT share price has crashed by almost a fifth since coming close to £2 on 12 July. After this…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

How I’d invest £1,000 in growth shares today to target £5,000 in a decade

Our writer reckons he could do well by choosing the right growth shares today and holding them in his portfolio…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

How passive income from stocks can speed up early retirement

By investing patiently over the years, buying quality shares has given me enough passive income to retire 10 or even…

Read more »