Why I’m sticking with the Premier Oil share price for 2019

I reckon the Premier Oil plc (LON: PMO) share price is set to make strides in 2019, and I’m holding.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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. 

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 of 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »