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Is the Premier Oil share price too cheap?

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The Premier Oil (LSE: PMO) share price has performed abysmally over the past 12 months. Over the past year, the stock has declined in value by 82%. That makes it one of the worst-performing companies on the London market.

However, the group is in the middle of a transformative merger, which I believe could revolutionise the enlarged company’s prospects. And it could potentially lead to a substantial increase in the firm’s market value. 

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Merger plans 

Towards the end of last year, private equity-backed Chrysaor approached Premier regarding a potential reverse merger. Under the proposal’s terms, the private business would become public by using the Premier Oil share price as a window to the market. 

Chrysaor’s management saw an opportunity to combine two of the North Sea’s largest independent oil and gas producers to create a giant, which had the financial firepower and economies of scale to compete effectively with the major players. 

Pending approval from shareholders (slated for the 12 January) the combination will create a North Sea giant. The new company is expected to produce 200,000-220,000 barrels of oil equivalent per day (boed) next year. That’s a substantial increase on the average production figure of boed reported for Premier in 2020. 

What’s more, Chrysaor has hedged about 67% of its first-half 2021 oil output at an average $60 a barrel. I think this will provide the group with some stability and predictability in an uncertain environment. 

Time to buy the Premier Oil share price? 

After the merger, the enlarged group will be renamed Harbour Energy Plc. I think this is the right decision as it will help draw a line under Premier’s troubled past. 

During the past few years, the Premier Oil share price has been dogged by high production costs and enormous debts. These problems won’t vanish after the merger, but they should become easier to manage. 

Based on other oil producers’ valuations, the enlarged group’s production target of 200,000-220,000 boed could justify a valuation of as much as £1bn for the company. That’s based on current oil prices. At this level, Premier’s $2bn of net debt would appear far more manageable. 

As such, I think that now could be an excellent time to buy the Premier Oil share price before the company’s transformative merger. When the deal completes, the group will be one of North Sea’s largest oil producers. This could achieve enlarged economies of scale and better production costs, which will improve profit margins and help management deal with group debt.

That said, if oil prices fall further from current levels, the merger may not be enough to save the business. However, following recent declines, I think there’s already plenty of bad news baked into the Premier Oil share price.

That suggests even a slight improvement in the group’s fortunes could produce a substantial re-rating of the stock, giving the shares an attractive risk/reward profile, in my view. 

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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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