As recently as January, fellow Motley Fool writer Harvey Jones was suggesting that “Premier and Tullow are only for the brave.“
But nobody expected the coronavirus pandemic that’s devastated the oil price.
When Premier Oil (LSE: PMO) shares were suspended in early 2016, the price was stuck at 19p. But when Harvey was writing, it was back up at around 110p. I’d bought some Premier shares during the crisis. But I sold them in 2019 after realising it really wasn’t my strategy. I then saw the price rise to 2020’s highs and sighed.
Premier Oil crash
Since closing at 107.75p on 19 February, the Premier Oil share price has fallen all the way to 27p at the time of writing. That’s a 75% crash in just under three weeks, and it’s back to not far off that January 2016 bottom.
The big hit has come, of course, from the falling price of oil. Premier’s big problem is its huge debt, and the company really only has a viable chance of paying it down if the oil price remains high enough.
While oil was at around $60, Premier was pulling along reasonably comfortably. But as I write, it’s slumped to just $37.40 per barrel.
By 31 December, Premier had managed to get its net debt down to $1.99bn, from $2.33bn a year previously. That was still big, though coming down nicely. But after the oil price collapse, it suddenly looks crippling once again.
Tullow Oil crash
Things are perhaps even worse at Tullow Oil (LSE: TLW), whose share price had been sliding long before the new virus showed up. The virus hasn’t helped, and it’s played its part in sending Tullow shares down this month — over the same three weeks, Tullow shares are down 59%. But over the past 12 months, we’re looking at a fall of 92%. In fact, Tullow Oil shares are now cheaper than they’ve been since the early part of the 21st century.
The core problems are essentially the same — a combination of debt and low oil prices. But Tullow also has the added problem of disappointing production levels from its flagship Jubilee and TEN oil fields, and a resulting fall in free cash flow.
As my colleague Roland Head has pointed out, Tullow’s free cash flow fell from $390m to $350m in 2019. But worse than that, it’s expected to drop to just $150m in the current year.
Debt was coming down too, but it still stood at $2.8bn at the end of 2019. Free cash flow of $150m isn’t going to make much of a dent in that.
What to do?
We’re looking at super-low P/E valuations right now, and both of these companies have been close to failing before. But both pulled through. Can they do it again?
We couldn’t have predicted the coronavirus threat. But we could have guessed that something could cause oil prices to slump again. I certainly didn’t expect anything like the current fall so soon, but it does help illustrate the scale of the ‘unknown unknowns’ in the oil world.
I’d already decided that stocks like Premier Oil and Tullow Oil are too risky for me, and I’m staying well clear.
Alan Oscroft 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.