Why Have Premier Oil PLC Shares Doubled Today?

Don’t you just love it when you wake up to a Monday in which one of your share holdings has doubled in price? That’s what happened to me with Premier Oil (LSE: PMO) today, when I spotted an early rise of more than 100% — as I write now, it’s dropped back a bit for a 95% gain to 37p.

Actually, I shouldn’t get too excited, as all it really means is that I’m now only about 50% down on Premier! But what’s it all about?

E.ON assets

Back on 13 January, trading in Premier Oil shares was suspended just before the firm announced it had agreed to buy up E.ON’s UK North Sea assets, for a final sum of $135m after a completion adjustment was reduced. The deal should be immediately cash generative and will, apparently, be “accretive to lending covenants” — and it will also provide tax-related benefits, with the all-cash transaction increasing Premier’s tax losses to $3.5bn.

That suspension was lifted today and the market has clearly reacted with some enthusiasm.

One of the big fears surrounding Premier Oil is its current debt mountain of around $2.2bn, and with oil prices hovering at $30 to $35 a barrel, that wouldn’t be serviceable indefinitely. So Premier Oil, like many others, will need a significant recovery in the price of oil to start getting back to safety, or else we could see a dilutive new round of fundraising before much longer.

But low oil prices have an upside too, in that acquisitions like this month’s are possible at much lower prices — and the E.ON takeover should help keep the wolves away from Premier Oil for a while longer.

Tasty resources

The newly-aquired assets are mainly in the Central North Sea, West of Shetlands and the Southern Gas Basin, and cover key resources including interests in the Elgin-Franklin, Huntington, Babbage and Tolmount fields. As well as adding around 15,000 barrels per day to Premier’s production volume, taking 2016 estimates to between 65,000 and 70,000 bpd, the deal should add headroom of around $500m to the company’s covenant position.

Is this a good result for Premier Oil shareholders? Undoubtedly, I’d say, as it does appear to provide a significant bit of breathing space for the company and significantly reduces the possibility it will need to go seeking any refinancing. The City’s brokers see the latest progress as good news too, with Nomura having already upgraded its stance from hold to buy, noting that it’s still risky but upping the price target to 80p.

Oil recovery still needed

Premier Oil does, of course, still need to see an oil price rise in the medium-to-longer term. Its current production costs, while efficient, aren’t low enough to keep it afloat indefinitely. But with most commentators expecting higher prices before the end of this year, I’m a relatively happy shareholder today.

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Alan Oscroft owns shares in Premier Oil. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.