If you want a barometer of the oil price, you don’t need to look much further than Premier Oil (LSE: PMO) shares.
In the past few months as oil has declined from over $85 per barrel to under $60, a fall of 30%, the Premier Oil share price has fallen by 50% over the same period.
Its shares are, clearly, geared up from the oil price. That’s to say, a rise in the oil price is likely to result in a bigger percentage rise in the Premier price, while a fall is likely to result in a bigger percentage share price fall.
Debt
Considering Premier’s high debt levels, that’s entirely to be expected, and it’s partly why I bought some Premier Oil shares in late 2015 at 99p. I was convinced the oil price was way below any sustainable long-term level and that (what I saw as) the inevitable long-term recovery would gear up my investment in Premier shares.
As is so often the case, my timing was awful, and with the shares now trading at 71p, I’m sitting on a 28% loss. But timing aside, I think my underlying reasoning was sound and that it will produce a profit in the long term.
I was pinning my evaluation on a long-term oil price of around $75 per barrel, and I still think that’s a reasonable expectation with a horizon of five to 10 years.
Balance sheet
But even without worrying too much about any specific oil price level, anything that leaves Premier profitable and able to pay down its debts would bring down its gearing, improve its safety and, hopefully, help firm up its share price.
As Rupert Hargreaves recently pointed out, “Premier’s sell-off has been so severe because investors are worried about the group’s borrowings — an issue the business has had for some time.”
Having said that, he added: “However, this year the group has taken serious strides towards reducing its leverage.”
The most recent step in that direction is the sale of interests in the Babbage Area to Verus Petroleum, for which Premier has received £30.3m ($38.7m) after adjustments. Verus will also “take on exploration commitments valued at c.$24m,” and the proceeds will be used to pay down Premier’s existing debt.
Production update
We had a production update at the same time, and Premier “continues to forecast full-year production of around 80 kboepd.” The firm has, apparently, “hedged over 30% of its 2019 forecast oil entitlement production at an average price of $70/bbl,” and that looks like it was a canny move, to me.
Premier Oil is still a risky investment, certainly, but the company is way past the worst of its crisis and is focusing on reducing its debt mountain. If it survived $30 oil, I see it as well-placed to progress from $60 oil.
And the more the company’s gearing falls, the more I see positive sentiment returning.
