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Will penny share Premier Oil make an enticing investment as Harbour Energy?

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FTSE All-Share-listed penny share Premier Oil (LSE:PMO) will soon make a major comeback. Chrysaor Holdings is acquiring the company and re-listing as Harbour Energy on April 1. This will create the largest independent oil and gas producer on the London Stock Exchange. It also presents an exciting fresh start for the highly indebted firm.

Raising production output

So, will one of the UK’s most widely traded penny shares make an enticing long-term investment?

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In a December statement, both companies said Harbour Energy would aim to produce over 200k barrels of oil equivalent a day (boepd). Chrysaor’s 2020 production reached 173k boepd, while Premier Oil’s production averaged 61.4k boepd. In comparison, BP averaged 2.4m boepd in 2020 while Shell averaged 3.4m boepd.

The CEO of Harbour Energy will be Linda Cook, making her the second female chief executive at a London-listed oil and gas company. Cook has a firm grasp of the industry, having previously worked for Royal Dutch Shell for 29 years. I think her extensive experience will be a significant advantage in steering Harbour Energy to become a global exploration and production company.

The new entity is predicted to have a strong balance sheet, which will support international growth and a dividend.

A clean slate

But ahead of Petrofac, Premier Oil is the most shorted share in the UK today. It’s long been a short target due to its high level of debt. Yet I find it strange that this is still going on, considering the company is not about to go bust. It may simply come down to institutional investors taking an opportunistic interest in making money from shorting until the merger goes through. 

With its debt forgiven, the restructured group could well be in an excellent position to ride the oil price recovery. But Premier Oil is well known for its high share price volatility in recent years. Therefore, I’m expecting Harbour Energy will be a highly speculative stock to begin with.

Chrysaor shareholders will own 77% of the new company. Meanwhile, current Premier Oil shareholders will only own 5% of Harbour Energy and 18% will go to Premier’s creditors. Therefore, I’m not tempted to buy these penny shares today.

A money-spinning penny share

Until the pandemic is fully under control, demand for oil will stay low, which will keep the oil price suppressed, these remain risks to the business long-term. However, I feel bullish on the oil sector enduring because our lives remain heavily dependent on oil. In fact, Goldman Sachs believes the Brent crude oil price could reach $75 a barrel in Q3. And Rystad Energy recently said it believes offshore projects are set for record growth in the next few years.

Premier Oil already has several projects underway. The pandemic, suppressed oil price and company debt, hampered these in 2020. But with light at the end of the tunnel, I think these projects could soon be back on a money-making trajectory for shareholders.

Projects include first gas at Tolmount in Q2, Zama in Mexico, Tuna in Indonesia, Sea Lion in the Falklands and further exploration in Indonesia and Mexico.

I’m certainly tempted to buy shares in Harbour Energy. That’s because I see it as an exciting venture coming just as the oil industry enters a new chapter. However, I’m waiting to see what price the shares come in at and how the oil outlook appears once Harbour Energy lists.

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Kirsteen owns shares of BP and Royal Dutch Shell B. 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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