The Premier Oil (LSE: PMO) share price fell by more than 20% in early trading on Thursday. The fall came after the North Sea firm reported a $672m loss for the first half of 2020 and announced plans to raise up to $530m by selling new shares.
In my last piece on Premier I warned that shareholders buying this stock faced significant risks. Today, I’m going to review the latest figures and explain why I still think this is a stock most investors should avoid, despite the potential for gains.
A super operator
I’ve always rated Premier as a good operator. Today’s results confirm that impression. Production during the first half of the year was on target at 67,300 boepd (barrels of oil equivalent per day). The firm’s full-year guidance of 65,000-70,000 boepd is unchanged.
Low operating costs of $18 per barrel mean Premier still generated operating cash flow of $324m during the first half, despite March’s historic oil price crash.
Existing projects are progressing well and the acquisition of the Andrews Area and Shearwater assets from BP has been approved by lenders. These fields should add another 19,000 boepd of production.
Given all of this, why isn’t the Premier Oil share price rising? And why aren’t I buying?
Shareholders must stump up at least $325m
The first half of the year was incredibly tough for oil producers. But Premier still managed to generate $25m of surplus cash. This was used to chivvy down the group’s net debt, from $1.99bn to $1.97bn.
Unfortunately, fiddling around the edges like this won’t be enough to allow Premier to repay its debts by the current deadline of May 2021. The group isn’t generating enough cash to fund the $230m upfront payment required for the BP deal either.
Given all of this, today’s news of yet another refinancing isn’t a complete surprise. To extend the maturity of its loans to March 2025 and complete the BP deal, Premier will try to raise up to $530m by selling new shares. A minimum of $325m will be required for the refinancing to go ahead.
Why the Premier Oil share price could keep falling
Assuming it’s approved in a formal vote by the group’s lenders, I think this refinancing deal should secure Premier’s future for the next few years.
However, the deal will see the average interest rate on Premier’s debt rise by 1.4% to 8.34%. My sums suggest that interest payments alone will cost around $165m per year. That’s around $13 for every $100 of revenue, based on 2021 forecasts. Debt costs like this aren’t likely to leave much profit for shareholders, unless oil prices rise sharply.
Shareholders are also facing heavy dilution. At the last-seen share price of 27p, Premier’s market-cap is just £265m, or around $345m. Given that Premier has to raise at least $325m from shareholders, I think we can expect the group’s share count to double, at least.
If shareholders refuse to provide the new cash, the group could go into administration. That would send Premier’s share price to zero pence.
This stock will probably remain volatile over the next year. But, in my view, this situation is far too risky for most investors. It’s certainly a stock I’ll be avoiding.
