The Motley Fool

Why I believe the Premier Oil share price is still far too cheap

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images.

The Premier Oil (LSE: PMO) share price has risen by more than 40% already this year. I believe further gains are likely over the next two years, as the firm gradually repairs its balance sheet.

Operational excellence

Today’s trading update confirmed that the company’s operations are performing well. Production is ramping up at the flagship Catcher field in the North Sea, and Premier’s management say that the firm is on track to meet full-year guidance of 80,000-85,000 barrels of oil equivalent per day (boepd).

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Looking ahead, the group is planning to appoint “a pathfinder bank” to start arranging financing for the Sea Lion project in the Falkland Islands. And Premier will try to firm up the size of its Zama discovery off the coast of Mexico by kicking off a three-well drilling programme during the fourth quarter.

Falling debt offers opportunity

Premier’s operational performance has been consistently good in recent years. The potential problems are in the finance department. The company went into the oil crash with far too much debt and only survived thanks to a complex refinancing.

Oil’s recent surge to $77 per barrel has been a blessing for the firm. It’s taken advantage of stronger prices to lock increase its hedging for the year ahead. If oil remains stable for the rest of the year, boss Tony Durrant expects to report a “significant” fall in the group’s $2.7bn net debt during the second half of the year.

The shares currently trade on a 2019 forecast P/E of just 5.8. If borrowings fall as planned over the next 18 months, I think the shares should be worth 150p-200p by 2020. I continue to hold.

This debt-free firm could rocket

Shareholders at Cairn Energy (LSE: CNE) have needed patience in recent years. In 2012, the company had net cash of $1.5bn and no production. By the end of 2017, net cash was down to $86m, but production is set to reach 17,000-20,000 bopd this year.

The Catcher and Kraken fields in the North Sea are now producing oil. And the company is also working towards the development of its world-class SNE field, offshore in Senegal. The initial production target is for 100,000 barrels of oil per day from the lower reservoir, which is thought to contain around 240m barrels. The upper reservoir is of a similar size and will be targeted in later phases of production.

A possible $2.4bn windfall

The only fly in the ointment is that Cairn’s 5% shareholding in Vedanta Limited is currently frozen due to a tax dispute with the Indian government. This stake was valued at $1.1bn at the end of 2017.

There’s no way to know how this dispute will end. But in addition to the tax dispute, Cairn is also claiming for damages and other seized assets to a total of $1.3bn. If successful, these claims could result in the company receiving a cash windfall of around $2.4bn.

I don’t expect the full amount to be awarded. But given the group’s £1.5bn ($2.1bn) market-cap, even a partial award of damages could give a huge boost to the group’s share price.

In the meantime, Cairn is expected to report earnings of $0.13 per share this year, rising by 70% to $0.22 per share in 2019. These figures put the stock on a forecast P/E of 26, falling to a 2019 P/E of 15.5. With a lot of growth still to come, I’d rate the shares as a buy at this level.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of Premier Oil. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.