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Here’s why the PMO share price could continue to climb

Image source: Getty Images.

As someone who bought Premier Oil (LSE: PMO) shares not long before their big crash down as low as 19p, I’m obviously quite relieved to see the price up to 125p and to be on a modest profit.

It’s pretty much all down to the recovering price of oil as even a few dollars per barrel can swing the balance between the value of Premier’s assets and the size of its debt mountain.

Premier is still not out of choppy waters, with net debt currently standing at around $2.65bn, though a successful refinancing of debt coupled with forecasts for a return to solid positive EPS are helping get it down.

Trade war

But could Premier’s recovery unravel due to the prospects of Donald Trump’s one-man trade war? It could certainly have an impact, as China is one of the world’s biggest consumers of oil. And if trade wars escalate further, as is looking increasingly likely, we’re almost certain to see a hit on the Chinese economy and a likely reduction in demand.

But at the same time, President Trump’s increasing sabre-rattling over Iran could well help counter that and provide a bit of support for oil prices. Could increasing tension in the Middle East and any rising possibility of supply cuts counter the possible China effect?

Well, we’ve probably yet to see the full effect of both OPEC and the USA lifting their oil production in order to take advantage of today’s higher prices, as a number of squeezed economies need every dollar they can get. And I see that as likely to apply a brake effect on the rising oil price.

But so far, oil prices appear to be reasonably stable above $70, and at that level I still see Premier Oil shares as very good value. Forecasts show Premier back to decent earnings per share this year which would put the shares on a P/E ratio of 11.6 — and if the big earnings boost currently being predicted for 2019 comes off, we’d see that multiple drop as low as 5.1. But how realistic is that?

First half

Premier Oil’s first-half figures should be with us on 23 August, and in a trading update earlier in July, chief executive Tony Durrant told us that “the ongoing strong performance from our underlying portfolio and our continued focus on cost control, will result in significant free cash flow generation and material debt reduction in the second half.

Full-year net debt reduction should be around $300m-$400m at current oil prices, with production across the company’s assets looking strong and with new exploration licences offshore Mexico and Indonesia having been signed. The latter looks good to me, as it helps reinforce a forward-looking agenda rather than the firm’s all-hands-to-the-pumps approach as it has for so long been focused more on simple survival.

And crucially, the firm’s very expensive development at its Catcher field is paying dividends with healthy production and is no longer looking like the money pit that it once did.

But for me, the big attraction of the Premier Oil share price is that it still looks to be at a level that’s assuming a realistic possibility of the company going bust — and I see almost no chance of that happening now.

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Alan Oscroft 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.