On the 4th of July, I advised investors that it may be sensible to sell Premier Oil (LSE: PMO) shares after the stock doubled in value in a few weeks.
Since then, shares in the oil producer have slumped by more than 50%. I think there could be further declines to come.
Premier Oil shares
The company’s indebtedness and low oil prices were the two main reasons I recommended selling the shares in July. These pressures have not gone away. It seems as if they’ve got worse.
Oil prices have continued to languish, and Premier’s debt mountain remains a threat to the company’s survival. The group is trying to reduce its obligations by asking shareholders for more money.
It’s seeking to raise $530m from shareholders as part of a $2.9bn refinancing. By comparison, the company’s current market capitalisation is £180m, or $234m.
This suggests the cash call will significantly dilute investors. As such, I think now is a good time to sell Premier Oil shares ahead of further declines. If the company goes ahead with the equity raise, I reckon the shares could fall another 50% from current levels.
Instead of Premier, I’d buy online property portal Rightmove (LSE: RMV).
A better buy
These two businesses couldn’t be more different. The latter is a fast-growing tech company, which is highly cash generative and has a strong balance sheet. The other is a North Sea oil producer, which is struggling to survive.
While Premier Oil shares might look cheap compared to those of Rightmove, I think investors should look past the company’s valuation. Yes, the North Sea oil producer looks cheap, but it may not survive long enough for investors to make any money on the stock.
Rightmove, on the other hand, appears to have a bright future. The company is one of the most visited websites in the UK, which is a strong competitive advantage. It also has a mountain of cash on its balance sheet, so it is unlikely to run into any financial problems.
Further, the company does not have to spend a lot of money on developing and building its operations. This makes it highly cash generative. What’s more, because of its position in the market, it can charge customers whatever it wants. This combination of cash generation and market domination has helped the firm produce large total returns for investors over the past five years.
For example, £10,000 invested in Premier Oil shares in September 2016 is worth £3,500 today. The same £10k invested in Rightmove would be worth nearly £17k.
I think these figures show why Rightmove is a better investment than the North Sea oil company. As such, now could be the best time to switch Premier Oil for Rightmove in your portfolio.
