The Premier Oil share price is up 60% today! Here’s what I’d do now

The Premier Oil (PMO) share price is rising fast. Roland Head explains what’s happening.

| 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.

It’s been a wild week for the Premier Oil (LSE: PMO) share price. Shares in the North Sea oiler have plunged from a high of 31p on Monday to close at 13p on Thursday.

As I write on Friday morning, the stock has now whipsawed back up 60% to trade at 20p. This move has followed an update from the firm which suggests it can survive the year with oil at $35.

What’s happening?

Saudi Arabia and Russia triggered an oil price crash on Monday when the pair failed to agree on new plans to cut oil production. In response, the Saudis announced that they would increase production by more than 20%, flooding the market with cheap crude.

With demand already weakening due to the coronavirus, oil prices crashed. The black stuff is now trading at $35, down from around $54 one month ago.

There’s an interesting backstory to this situation, but what we need to remember is that an oil price crash is seriously bad news for Premier. Seriously. Bad. News.

Why so worried?

Premier has two problems. Firstly, although it can ‘survive’ lower prives, it needs an oil price of nearly $50 per barrel to break even, on a cash flow basis. With oil prices under $40, the firm will be losing cash on each barrel it pumps.

For a well-funded company with cash in the bank and minimal debt, this would be sustainable for a while. But Premier isn’t that company.

The firm reported net debt of $1.99bn at the end of 2019. That’s a multiple of 2.3x EBITDAX (cash profits), which is above my comfort level of 2x.

Premier’s lenders may be uncomfortable too. Lower oil prices mean falling profits. I think it’s likely that the firm’s leverage could soon move beyond the limits agreed with its lenders. That could trigger refinancing and further losses for shareholders.

Why the Premier share price is rising

In today’s update, Premier says that it should be able to achieve neutral cash flow in 2020, even if oil stays at $35 per barrel. This will be achieved by cutting $100m from planned spending.

Alongside this, the company is still hoping to generate extra cash flow from planned acquisitions in the North Sea. But this deal may not go ahead.

An $871m deal in the North Sea

Premier is currently in dispute with its largest lender over plans to spend up to $871m acquiring additional North Sea oil fields.

Boss Tony Durrant says these acquisitions will boost the group’s cash generation and speed up debt repayments. But this deal will also require $300m of new debt, an extension of the group’s existing loans and a $500m equity fundraising.

There are a lot of moving parts here. I think it’s a fairly risky deal, although it might work out well if oil prices bounce back quickly.

Why I’d avoid PMO shares

In my view, anyone buying Premier Oil shares today is betting that the price of oil will recover quickly.

If oil doesn’t recover over the next few months, I don’t see much value in the firm’s shares. Indeed, I suspect the group could suffer a repeat of its previous debt problems.

In my view, there’s a real chance the Premier share price could go to zero pence. For that reason, I see this as a stock to avoid.

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.

Roland Head 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.

More on Investing Articles

Young Asian man shopping in a supermarket
Investing Articles

I’d shun Lloyds Banking Group and consider this stock for passive income instead

This company's dividend record knocks spots off Lloyds Banking Group's, and it looks like decent value now with a yield…

Read more »

Investing Articles

Will the 5.6% BT Group dividend yield grow in 2024?

Zaven Boyrazian explores whether BT Group can continue hiking its dividend and if the telecoms giant belongs in his income…

Read more »

Investing Articles

FTSE 100’s near a 52-week high, but this stock’s still dirt cheap!

The FTSE 100's on the rise, but not all stocks have been so fortunate. Here’s one company that got left…

Read more »

Investing Articles

Is this ‘secret weapon’ a multi-billion pound reason to buy Lloyds shares?

Dr James Fox explains how Lloyds shares could rise even higher as the bank's 'strategic hedge' is likely to boost…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

3 of the best penny stocks for growth, dividends, and value!

Looking for top penny stocks to buy? Royston Wild believes these UK small-cap shares could prove lucrative investments in the…

Read more »

Investing Articles

How I’d aim to turn an empty ISA into £275k by purchasing cheap shares this summer

Harvey Jones is taking advantage of the summer stock market lull to buy cheap shares and build a high and…

Read more »

Investing Articles

What’s the minimum I need to invest every month to earn a meaningful passive income?

When looking to secure a stream of passive income it's important to be realistic. Our writer investigates a strategy to…

Read more »

Investing Articles

These 2 great value income stocks could help me get rich and retire in style

These two FTSE 100 income stocks have terrific track records of dividend growth and Harvey Jones wants them in his…

Read more »