A small-cap growth stock I’d buy alongside Premier Oil plc

Could 2018 be the year Premier Oil plc (LON: PMO) and other oil and gas explorers come in from the cold?

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For a couple of years now I’ve been thinking Premier Oil (LSE: PMO) could finally be looking forward to a new era of growth — but perhaps the fact that I own some shares has made me a little too optimistic.

The company has been slowly chipping away at its debt and although it still stood at $2.7bn at the interim stage, it’s coming down as Premier targets a leverage ratio of three times EBITDA by the end of 2018.

The Catcher project is still on schedule for the delivery of first oil in December, and that should generate more cash for reducing debt further. And total production is expected to meet Premier’s raised target of 75-80 kboepd for the full year.

On top of that, there’s a new agreement signed for the supply of gas to Vietnam, and the sale of the Wytch Farm field to Perenco UK has been finalised for a total value of $275m. 

Shares up

Since a 2017 low in June, Premier shares have regained 59% to 70p, and what’s most likely to be driving that is an uptick in the oil price. After being stubbornly stuck at around the $50 level for a couple of months, it’s pushed up to $58 per barrel as I write, and every uptick should provide a geared-up benefit to Premier Oil.

It’s too soon to assume higher long-term oil prices, and a loosening of OPEC restrictions could possibly lead to a new short-term supply glut. But I’m optimistic we’ll see a price of around double the low point of early 2016 before too much longer — about $65.

There’s still a risky year ahead, but I really see my glass as more than half full now.

A winner too?

If Premier Oil recovers as well as I hope, I can’t help feeling that Rockhopper Exploration (LSE: RKH) could very well share in the success. The much smaller explorer has had its shares battered during the oil price crisis, as have many of its sector compatriots. At 23.4p we’re looking at an 85% fall over five years — and that’s one of the smaller oilies that I thought would do well back then.

Rockhopper is expected to record small losses for this year and next, but first-half results revealed cash resources at 30 June of $62.5m and no debt — with a $337m development carry from Premier for the development of Sea Lion Phase 1 playing a part.

And that’s the big connection — Premier took a 60% interest in the Sea Lion field north of the Falkland Islands in 2012, with Rockhopper retaining the remaining 40%. And Premier is aiming at 2018 for a sanction date for the project.

Relatively safe

Meanwhile, the partners are working on the financing for it, via a proposed $800m senior debt deal.

Rockhopper also has interests in a number of other resources around the world, which should lessen its risk compared to some other smaller explorers for whom a single asset could be make or break.

And, as the oil price has been creeping back up again, so has the Rockhopper share price. Since the middle of August we’ve seen a 29% gain, largely echoing the rise in the price of a barrel of crude from that $50 level to $58.

Could 2018 be the year of the great oil stock comeback? I do hope so.

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 in 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.

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