I was lucky with Premier Oil (LSE: PMO). I bought some shares back in the oil price crisis. They subsequently slumped, but I sold later when they recovered the bulk of the loss. Since then, the Premier Oil share price has been volatile, to say the least, and it’s been hammered badly in the Covid-19 crisis.
Premier Oil has been at risk of going bust and has escaped by the skin of its teeth a number of times now. And the way its fortunes have been swinging, I’ve been lurching between positive and negative opinions. When I last covered the stock, I thought I saw a buy (even if I wouldn’t touch it again myself).
My take, in June, was this: “Either the company will collapse under the weight of its debt and the price will drop to zero. Or it will survive, will get back to chipping away at that debt, and the PMO share price will climb over the long term.”
But it looks like chipping away won’t be enough, as interim results released Thursday showed a fall in operating cash flow. For the first half of 2019, the firm reported a figure of $545m, but this year it’s down to $324m. And free cash flow of $25m (down from $188m) just doesn’t make much of a dent in the debt pile.
Premier Oil share price falls
On top of that, Premier needs to find the cash to fund the acquisition of some assets from BP. I think investors could be forgiven for wondering if a buying spree is a good move for a company in this state at this time.
Anyway, we now have plans for a massive new equity issue. And that news knocked 25% off the Premier Oil share price on the day. It’s down around 25p again, and I’m still mightily relieved that I sold when I did.
Premier proposes to issue $230m in new shares to cover its proposed BP acquisitions. And then another $300m for debt reduction, of which senior creditors will underwrite $205m in a debt-to-equity conversion. If at least $325m (excluding the underwriting by creditors) is not raised, the plan will be off. The company’s current market cap is only around $330m, so it’s a big issue.
On the brink again?
Creditors are underwriting part of the deal, but I’m not sure that really lends confidence. After all, they wouldn’t exactly gain if they declined to do so and Premier went bust. So what’s going to happen to the Premier Oil share price now?
I find myself yet again thinking we’re looking at a life or death pivot for Premier. If the deal goes ahead, there’ll be huge dilution. But it might push the debt crisis back at least a few years — and the shares could recover strongly. But if it doesn’t, investors might end up saying goodbye to it all.
What I do know is that I’m going nowhere near it, either way. I’d prefer a more relaxing pursuit… like shark wrestling.
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.