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Why the Premier Oil (PMO) share price fell 2% in August

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Silhouette of an oil rig
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Premier Oil (LSE:PMO) has had a turbulent share price for several years now and August reflected this, although all-in-all it only fell 2%. Starting the month at 82p, it fell to a low of 64p and ended up back over 80p.

Positive returns

The company’s interim results released on August 22 were very good. Earnings rose to $680m, up from $488m in the same period in 2018. Production, revenue, and debt reduction were all ahead of forecast, which contributed to much-improved free cash flow. This caused a small spike in the share price on the day of the results, but unfortunately, its share price suffered thanks to its high level of debt ($2,386m) and concurrent link to the oil price.

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A key to tackling the debt pile is the price of oil. When the price is high, the company earns more and can get rid of debt more quickly, but when it’s low, tackling its debt is not so easy.

Sadly for PMO, the oil price has not been making significant gains recently thanks to the turbulent times we’re living in. It continues to be weighed down by the global threat of an economic slowdown and ongoing trade war between the US and China. The price-of-oil has hovered between $52 and $56 a barrel throughout August, finally reaching $60 when the trade war tensions eased last week. Premier’s biggest slump for the month was on the August 14 when recession warnings started around the world as the US bond yield curve inverted. 

Zama is a Mexican oil find that Premier is a big part of. It was discovered in July 2017. Recently Premier decided to divest Zama, which I think could be a very good move in helping to reduce its ever-looming debt. I hope this sale doesn’t come at the expense of future production profits though. In its report, Premier confirmed it retains exposure to exploration upside in Mexico through other offshore licence interests, which have the potential to deliver future material value for Premier.

Another promising project is Sea Lion, in the Falkland Islands, but unfortunately for PMO, the costs to first oil for Sea Lion have increased from $1.5bn to $1.8bn. It now intends to farm this out to a third party while further pursuing debt reduction. 

The company has a £647m market cap and trailing price-to-earnings ratio of 4.6, its operating margin is 35%, trailing earnings per share is 17.6p and it does not offer a dividend.

Turbulent times ahead

Looking ahead, PMO is on schedule and under budget in developing the Tolmount gas field, which will support revenue and operating cash flow in late 2020 and through 2021. It also has offshore Indonesia gas fields to boost revenues in early 2020.

However, the company has not upgraded its production forecast and I worry that this implies the outlook for the second half of 2019 is not looking so rosy.

Working in areas such as Indonesia exposes the company to adverse weather. For example, tropical storms can cause production to go offline, which can have a significant impact on the company’s earnings.

More worrying for me is the increasing possibility of a global recession, which would cause the price of oil to fall. The International Energy Agency and OPEC are both predicting oversupply of oil in 2020. These are risk factors that make this share too hazardous for my liking.

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