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Why I’m bearish on Premier Oil plc and Tullow Oil plc as oil prices falter

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At first glance, today’s final results from Premier Oil (LSE: PMO) looked pretty slick. However, its share price has fallen 4.03% at time of writing. Are investors looking at a company on the skids again? 

Catcher 22

So, to the slick part. Premier’s chief executive Tony Durrant kicked off the company’s 2016 annual results by hailing it as a robust business which continues to deliver excellent operational performance”. He hailed record production from a low operating cost base, and the value-adding acquisition of E.ON’s UK upstream portfolio. Its Catcher project made significant progress, he said, with an anticipated step-up in production levels once it comes on-stream later this year. 

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The complex refinancing that has created uncertainty and volatility is now nearing completion, and the future looks brighter. “Our strong and growing cash flows will reduce our debt and in due course allow us to invest in new projects to deliver value for all our stakeholders,” Durrant concluded.

Losing streak

Those who dug a little deeper discovered that Premier Oil had just posted its third consecutive annual loss before tax, despite cutting costs and ramping up production. Its annual pre-tax loss of $390.6m was a marked improvement on $830m in 2015, but uncomfortably below analyst estimates of a $93m profit.

On the plus side, production hit 71.4 barrels of oil equivalent per day, up 24% from 57.6 last year. Premier also boasts a high operating efficiency of 91% and expects to be net cashflow positive this year, with refinancing talks to conclude in late May after lenders and bondholders had signed off on new terms. 

Till debt do we part

That still leaves net debt of $2.8bn, up from $2.2bn in 2015, if down slightly since Q3. Premier has cash and undrawn facilities of $593m. We all know that only one number really matters, and that is the oil price. Premier’s share price spiked on the surprise OPEC and non-OPEC production cuts but has plunged 27% in the last month as inventories continue to rise regardless.

Fellow explorer Tullow Oil (LSE: TLW) has also been hit, its share price down 17% in the last month. Its 2016 results, published one month ago, showed sales revenue falling 21% to $1.27bn and gross profit down 8% to $546.9m, despite cutting administrative costs by 40% and restructuring costs by 70%.

Shale and hearty

Tullow is sitting on even more net debt, which totalled $4.8bn at year end, some $800m higher than 2015, although it can still claim “significant facility headroom” and free cash of $1bn. Last month, its corporate facility was extended by a further year to April 2019.

These are tough times for oil explorers and I don’t see things getting easier. I stuck my neck out two months ago and warned the production freeze wouldn’t boost oil for long, and currently feel justified. West Texas Intermediate has just dipped below $50 for the first time since December as crude stockpiles climb for a ninth consecutive month to hit a 35-year high. Cheap shale is starting to look like a game-changer, make sure you don’t get hurt.

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Harvey Jones has no position in any shares mentioned. 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.

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