The Premier Oil price has soared since I sold. Here’s what I’d do now

Premier Oil (LON: PMO) announces strong cash flow and exciting new acquisitions, but does it make sense with all that debt?

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After deciding my purchase of Premier Oil (LSE: PMO) shares was a mistake, I finally got round to selling them in November. Since then, perhaps inevitably, the share price has climbed 35%.

The recent advances in the oil price in response to escalating tensions between the US and Iran have certainly helped, with a barrel of Brent Crude now selling at $68. But most of that rise came on Tuesday, with the price up 17% at midday to lead the day’s winners, after the FTSE 250 company released two juicy pieces of news.

Update

The first is a trading and operations update ahead of 2019 results, which are due on 5 March. Production came in at 78,400 barrels of oil equivalent per day (78.4 kboepd), at the upper end of the company’s expectations, and progress has been good at key assets.

First gas from the BIG-P prospect in Indonesia was on schedule and below budget, and initial gas from the North Sea Tolmount prospect is on schedule for the end of 2020. Premier’s current 50% stake in the latter is expected to add 20-25 kboepd, and that alone would raise total output by up to 32% over the 2019 figure.

Other existing prospects are going well, but my first thought was how Premier’s net debt is going? There’s been a further reduction of over $300m, dropping the total from $2.33bn to $1.99bn, in line with guidance.

In the words of chief executive Tony Durrant: “Premier’s strong operational performance in 2019 has generated significant free cash flow for the group enabling us to materially reduce our debt levels and to invest selectively in our portfolio for future growth.”

Acquisitions

But the bigger news is of further North Sea acquisitions. Premier is buying BP‘s Andrew Area and Shearwater assets for $625m, plus a further 25% of Tolmount from Dana Petroleum. The Tolmount purchase will cost $191m plus contingent payments of up to $55m. The firm is also proposing to extend its existing credit facilities to 30 November 2023.

This would all be fine for a company with net cash. But I see a big question over whether it makes sense for Premier to be investing such large sums in new assets while it’s still shouldering such high debts.

But on the plus side, the news assets are expected to generate over $1bn in free cash flow by the end of 2023, and that would come in very handy for tackling the debt.

Balance

It’s all a bit of a balancing act, and what does encourage me is that Premier appears to be looking at the longer term rather than just plodding along and not really doing much forward planning until the debt has come down further.

The risk is that weak future oil prices could have an adverse impact on debt, though the firm has estimated a combined operational expenditure from the new assets of less than $20 per barrel equivalent, so the risk is perhaps relatively low.

On balance, I think this is all good news for Premier shareholders, so do I regret selling? Well, I got my timing wrong (as I often do), but it’s never been part of my strategy to invest in hugely indebted companies. No, I’m best out.

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 has no position in any of the shares 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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