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Does the Premier Oil share price make it a bargain?

The Premier Oil (LSE: PMO) share price has fallen by almost 50% from last October’s 52-week high of 147p. Is this a buying opportunity for canny investors, or a sign that this debt-laden business is continuing to struggle?

Today’s half-year figures have sent PMO shares up by about 5% at the time of writing. In this article I’ll explain why I think Premier Oil could be a speculative buy at current levels.

PMO is selling up

Since refinancing in 2017, Premier’s management has been working hard to repay debt, which has now fallen from a peak of about $2.8bn to $2.15bn. By the end of 2019, management expects this number to fall to $2bn.

The problem is that this is still a very large number. The firm’s debt repayment obligations outweigh anything else and effectively prevent the company from investing in major new projects.

Today’s results suggest that chief executive Tony Durrant has decided to speed up the deleveraging process.

Mr Durrant has announced plans to sell the firm’s stake in the Zuma field off the coast of Mexico. Analysts estimate that this could raise more than $400m, based on previous transactions.

The firm is also looking for a partner to invest in the development of the Sea Lion field in the Falkland Islands. Money from both disposals will be used to speed up debt repayments.

My view: I doubt that Premier could get the financing it needs to develop either of these projects at the moment. So it makes sense to monetise them instead. This should put the company in a stronger position to take advantage of future opportunities.

Super profits

Premier has a good track record as an operator and today’s results confirm this. Production rose by 10% to 84,100 barrels of oil equivalent per day (boepd), thanks to strong performance from the group’s Catcher field in the North Sea.

The firm also confirmed that the Tolmount gas project in the North Sea is under budget and on schedule to begin production in late 2020.

This strong focus on operations and limited spending elsewhere is delivering an impressive financial performance. After-tax profit rose by 23% to $121m during the first half of the year, thanks to operating costs of just $16 per barrel.

The group’s operating profit margin for the period was 40%, while return on capital employed — perhaps a better measure of long-term profitability — reached 12.4%, a respectable figure.

The right time to buy?

Today’s numbers highlight the extent to which Premier’s efforts are focused on cash generation and debt repayment. New exploration activity is extremely limited and as we’ve seen, the company is looking to sell stakes in its two biggest recent discoveries.

However, I think the company’s current financial performance is impressive and confirms its reputation as a strong operator with good technical skills. Even after allowing for its debt, I think the PMO share price looks decent value at current levels.

A price/earnings ratio of 7 looks cheap to me, as does a debt-adjusted valuation of less than four times operating profit. This situation isn’t without risk, but for investors with an understanding of this sector, I think Premier Oil could be a speculative buy at current levels.

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Roland Head 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.