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Why I think the Premier Oil share price could keep rising in 2021

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Oil pipes in an oil field
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On 31 March, Premier Oil (LSE: PMO) will merge with privately-owned Chrysaor and be renamed Harbour Energy. I expect Premier Oil’s share price to perform well after this merger, as I think the deal will solve Prem’s biggest problems.

Today I want to explain why I’m bullish on the outlook for this North Sea oil producer, at a company level and in terms of the wider oil sector.

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A frustrating story

Premier Oil has spent years struggling to get on top of the debt mountain it accumulated during the last oil boom. The company came out of the 2015–16 oil crash with net debt of nearly $3bn.

Despite restructuring its loans and raising funds from shareholders, Premier Oil has never really got on top of the situation. Net debt at the end of 2020 was still more than $2bn.

I believe Premier Oil is a good operator, with some decent assets. But the group’s debt burden has limited its ability to invest in new projects such as the Sea Lion field in the Falkland Islands. Paying dividends has been completely impossible.

Premier Oil’s share price has risen by 30% over the last year, but the stock is still worth 60% less than it was three years ago. Last year’s oil price crash was the final straw. Something had to happen.

Problem solved?

Pressure to cut carbon emissions has left oil companies with an increasingly bad reputation. But there’s still plenty of money in oil. Indeed, I believe we’ll see a strong recovery in oil demand after the pandemic.

Premier’s merger with Chrysaor will create a big producer with oil and gas production of over 250,000 barrels a day, compared to 61,000 for Premier alone. The deal will also include a refinancing that will settle Premier’s existing debts with a mixture of shares and cash.

This refinancing does mean that Premier shareholders will face more dilution — they will only hold around 5% of the shares in Harbour Energy. But in this situation, I think the advantages outweigh the disadvantages. Premier would still have needed to restructure its debts without this deal.

The combined company will be larger and should be sustainably financed. Future profits should also be boosted by $4bn of historic tax losses on Premier’s balance sheet.

Harbour’s management expect to generate enough cash flow to support “a sustainable dividend in the near-term”. I think this could become a decent income stock over time.

Premier Oil’s share price could be cheap

This situation isn’t without risk. I don’t yet know exactly how many new shares will be issued or what the combined group’s earning power will be at current oil price levels. But I feel confident that Harbour’s performance will be better than Premier Oil could have managed alone.

Premier’s lenders seem to agree. They have chosen to accept their full allocation of new shares in Harbour Energy, reducing the cash settlement they’ll receive. This suggests they think shares in the combined company will rise.

I would only invest a small part of my portfolio in Premier Oil shares, as I think this situation is still highly speculative. But at current levels, I think Premier stock could offer decent value.

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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.

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