I believe the Premier Oil (LSE: PMO) share price could double in 2019. This might seem like a sensationalist claim, but I think it possible based on the firm’s current trajectory.
The D word
I’ve always said one of the most significant issues hanging over the Premier Oil share price is debt. In 2016, management had to negotiate its restructuring with the group’s 40+ banks. Ultimately, this resulted in a successful reorganisation of the $2.8bn debt mountain, taking place at the beginning of 2017.
This level of debt is enough to scare off most investors, including myself. However last year, the company started to make headway paying down its obligations to creditors. In my opinion, this marked a turning point in the Premier Oil story. According to management’s projections, it expects net debt at the end of 2018 to be around $2.3bn (roughly 3x net debt to EBITDA). That’s a reduction of $390m since the end of 2017, exceeding its own guidance of $2.4bn.
Management is predicting further debt reduction in 2019, with obligations falling to an estimated 2.7-2.8 times EBITDA by the end of the first quarter of 2019. And by the end of 2024, management is forecasting a net debt to EBITDA ratio of less than one. That’s even after accounting for capital spending on new projects, exploration, and maintaining existing assets between now and the end of its seven-year plan.
Production is expected to hit more than 100,000 barrels of oil per day (kbopd) by 2024, up more than 10% from November/December’s level of 90 kbopd.
Will investors return?
Looking at these figures, it would appear that Premier is on track to reduce debt down to around 2.5 times EBITDA in 2019, and this reduction could draw investors back to the business.
Personally, I tend to avoid companies with debt of more than two times EBITDA, so this would still be a bit on the high side for me. But concrete progress in debt reduction is a big step forward for Premier, and I think the stock will jump higher as a result.
The share price is currently changing hands for around 4.5 times forward earnings, which seems to undervalue the business drastically, and its potential. A multiple of 8-10 times earnings would be more appropriate, and in line with the oil sector average of 9.
What’s the catalyst?
This valuation gap implies a potential upside of 100%, but without a catalyst, the stock could continue to languish. Further progress on reducing debt will be the catalyst that starts the move higher, in my opinion.
Without reducing debt further, there’s still a risk that the company may have to ask shareholders for additional funds if the oil price takes another dive. Even a modest further reduction in debt will eliminate this risk, allowing investors to buy in without having to worry about a potential rights issue.
That’s why I think the Premier Oil share price will double in 2019. Investors will rush to buy back into a cheap, rapidly growing oil company that’s reducing debt and throwing off cash.
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Rupert Hargreaves owns no share 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.