As financially geared plays on the price of oil go, Premier Oil (LSE: PMO) is a decent selection to make. But the big question to ask yourself is, do you want a geared bet on the direction of the oil price?
You can see how the firm’s share price tends to exaggerate the moves of the price of oil in the recent plunge since early October. The share price is down around 57% and the price of oil is about 36% lower. Of course, such gearing tends to work in both directions, so it’s tempting to buy shares in Premier Oil to ride the recovery in the oil price when it comes.
Oil could go either way
But what if the price of oil doesn’t recover? What if the high price we saw earlier in the century turns out to have been another bubble like the one we’ve probably seen in cryptocurrencies? I think there’s a good case for that. For example, every time the price of oil rises a bit, United States shale oil production seems to ramp up to choke off that rise in price. And longer term, the world’s dependency on oil looks set to retreat as alternative energy sources gain traction.
Meanwhile, my Foolish colleague Alan Oscroft pointed out recently that Premier Oil has been making moves to pay off some of its debts, which could make the firm’s shares more attractive to investors. But will a low-debt Premier Oil actually be as attractive as it is now for those who are seeking a geared play on the oil price? There’s nothing inherently safe in an oil company with no debts, just ask those holding shares in Soco International for confirmation of that. It doesn’t seem to matter which direction the oil price is travelling, cash-rich, debt-free, oil-producing Soco just seems to keep going down!
Is Premier Oil a target?
Yet my fellow Fool Roland Head raised the intriguing possibility that Premier Oil could become the target of an opportunistic takeover bid at these levels, just like several other oil companies have been. However, I think it would make a risky hold while you wait for something like that to happen because there’s no dividend to collect along the way. At least a dividend would give you something back – that’s one trifle that long-suffering Soco shareholders have been able to cling onto.
What worries me the most is that the economic sky looks more unsettled than it has for a long time and it makes me quite nervous for 2019. There is, for example, the possibility that the price of oil could halve again from where it is now instead of shooting back up as we hope. If that happened, I wouldn’t want to be holding any Premier Oil shares in the hope of a takeover bid, knowing as we do, that so far they have been geared to the price of oil.
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Kevin Godbold 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.