The Motley Fool

Premier Oil shares: Is it time to buy or sell?

Image source: Getty Images.

With Brent crude now priced at over $40, it’s evident that oil has made a decent recovery. This resulted in the Premier Oil (LSE: PMO) share price rising over 300%, to 54p. It is currently around 42p. While there has been a slight recovery in the oil sector, problems still abound. As such, is the Premier Oil share price a definite buy or is it destined for a decline?

Balance sheet weakness

Premier Oil has one of the weakest balance sheets in the oil sector, and I believe this could weigh heavily on its share price. Currently, the firm has $1.97bn of debt, compared to just over $200m of cash, and $1.1bn in shareholder’s equity. This is an excessive amount of debt in normal times, but in the current economic climate it’s a significant worry. Royal Dutch Shell and BP have recently had to write down the value of their assets. Similar action could be a major problem for Premier Oil, especially because its debt-to-equity ratio already stands at around 180%.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

What does the future hold in store?

The oil major has recently announced the acquisition of BP’s Andrew Area and its Shearwater assets in a deal worth up to $565m. This was slightly lower than the original price, and only $210m will have to paid up front. It is also stated that the new assets will be “immediately cash generative” and will therefore help the firm reduce its debts.

While this sounds good in principle, I do have some concerns about the deal. For example, it seems an odd time to be making expensive acquisitions, especially in the firm’s indebted position. As a result, many analysts believe that it will have to raise funds from shareholders in order to complete the deal. Equity funding has the result of diluting existing shareholders, and the Premier Oil share price should fall as a result.

Is the Premier Oil share price too cheap to ignore?

Premier Oil shares are down around 60% this year, with key metrics proving it’s a significantly undervalued stock. For example, it has a current price-to-earnings ratio of 2.7 and a price-to-book ratio of just 0.4.

But I’d take both of these values with a pinch of salt. Firstly, earnings should drastically decrease over the next few years, and this means that the current price-to-earnings ratio is not an accurate representation. The price-to-book ratio also doesn’t take into account the fact that many of the assets on the balance sheet are also overvalued.

In this respect, I believe that Premier Oil shares are too risky. While there is significant potential upside, bankruptcy is also a genuine worry. This would leave shareholders with nothing. If I were to bet on an oil recovery, I’d buy Royal Dutch Shell shares instead.

 

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Stuart Blair owns shares in Royal Dutch Shell. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.