I think the Premier Oil (PMO) share price could triple your money

Shares in Premier Oil have the potential to double or triple from current levels argues, Rupert Hargreaves.

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I will admit, I have been interested in the Premier Oil (LSE: PMO) share price for some time, but I have been waiting for the perfect opportunity to buy. I think we could be approaching that point right now.

Recovery under way

Over the past five years, I’ve been watching Premier closely as the firm has tried to pull itself back from the edge. It was touch and go for a while. However, it now looks as if the company has passed the worst, and is pulling itself out the other side.

During the first half of 2019, the company hit a production record, producing 84,100 barrels of oil equivalent per day (kboepd), up from 76.2 kboepd.

This healthy production, coupled with Premier’s low-cost base, generated $182m of free cash flow after capital spending during the first six months of 2019. Management used all of this money to reduce debt and strengthen the group’s balance sheet.

Net debt declined to $2.15bn at the end of June, down from $2.33bn at the end of 2018. The firm is looking to reduce net debt by between $250m and $350m for the full year.

As well as using cash from operations to reduce debt, Premier Oil is also looking to offload its share of the “world class” Zama prospect off the coast of Mexico. The firm owns a 15% interest in the Zama field, discovered in 2017. It is estimated to contain between 670m and 970m barrels of oil equivalent and could be worth as much as $430m according to the City.

Furthermore, Premier is looking to offload part of its 60% interest in the vast Sea Lion project off the Falkland Islands. Due to budget constraints, the company has not been able to develop this prospect since it was discovered in 2010. A price tag of $1.5bn is too much for Premier and its partners to handle at the moment. So, management is looking for other ways to raise the money. These include export credit funding from the UK government.

Falling debt

These two asset sales could help reduce Premier’s debt load dramatically. If it makes as much money as the city is expecting, the Zama sale could reduce Premier’s net debt by nearly 25% on its own.

And the more debt Premier can pay off, the brighter the firm’s prospects will become. Last year the company spent a staggering $271m on maintaining its borrowings, around 50% of operating profit. Reducing this outflow by just 50% would have a significant impact on the group’s bottom line.

Indeed, for 2018, Premier reported net income of $133m, reducing interest costs by 50% to $135m per annum, would double this figure — that’s without taking into account the company’s record production.

If management can eliminate the group’s debt, I do not think it is unreasonable to suggest that net income could double or triple from current levels thanks to lower interest cost.

In the best-case scenario, I reckon the share price could jump as much as 200% if everything else remains equal.

This could be an excellent opportunity for long-term, risk-tolerant investors to potentially double or triple their money.

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.

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.

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