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Premier Oil: What can investors expect once refinancing completes?

Completion of the refinancing will be significant de-risking event that should mark an end to any uncertainties over Premier’s finances.

Offshore oil operations
What happens with Premier's growth projects

So much of the attention on Premier Oil PLC (LON:PMO) has been focussed intently on the oiler’s pivotal refinancing and now that the debt questions are all but answered, what happens next?

The easy, simple answer is make money - keep producing and selling oil to make enough money to repay the lenders that allowed the company to stay afloat through the crude price crisis. Investors, meanwhile, hope there’ll be sufficient cashflow leftover to allow the company to keep growing.

The company itself phrases it as “providing a solid foundation for Premier to deliver strategic plans” which focus on “debt reduction and selective reinvestment”.

Precisely what that top-level mission statement actually means, investors will have to speculate.

So, let’s start by looking at what Premier Oil presently has.

Premier had record production of 71,400 barrels oil equivalent per day, marking a 24% rise year-on-year. Most of it comes from the Chim Sao (17,000 boepd) in Vietnam and the Natuna Sea (14,000 boepd) operations in Indondesia, and the Huntington (12,000 boepd), Solan (8,000 boepd) and Elgin Franklin (7,000 boepd) fields in the North Sea.

These five fields accounted for around 70% of Premier’s production in 2016, which somewhat explains why this week’s US$65mln disposal of non-core assets in Pakistan ranked as a ‘footnote’ for many investors.

Reserves stood at a substantial 835mln barrels at the end of 2016, whilst the debt tally was US$2.8bn.

Over the year, Premier generated US$431mln of cash flow, enabling a US$122mln profit after tax.

The Catcher field is due for ‘first oil’ in 2017 and it is the number one item on the company’s production growth ‘to do’ list. Once ramped up, it will yield some 25,000 boepd to Premier’s business.

The company is now forecasting some 75,000 boepd for this year, and that doesn’t include anything from Catcher - meaning a successful start-up could be a catalyst for the shares.

After Catcher, there are then question marks over Premier’s next three growth projects, all of which are needle-moving new field developments that will require meaningful capital investments.

The present timetable put forward by the company sees the Tolmount field, in the North Sea, coming online in 2020 delivering a further 20,000 boepd.

Elsewhere, in Indonesia, the Tuna field is slated for 2023 with a possible 25,000 boepd lift in output forecast.

The Sea Lion field, off the Falkland Islands, meanwhile, is bigger than Tolmount and Tuna combined.

Notably, the timeline for the 50,000 boepd Sea Lion field is looser right now - Premier says a slightly vague ‘+2021’ - and the Falkland field’s future is a subject of speculation.

Premier initially dealt into the project back in 2012, through a deal with Rockhopper Exploration, though since then strategies have changed somewhat and now a third partner is sought to help cover the development and start-up costs.

Appraisal and exploration successes in a 2015 programme of wells provided a valuable boost in this regard. Sea Lion can now be seen as more of a region opening venture with follow-on opportunities rather than a somewhat isolated and desolate stand-alone field in the South Atlantic.

The rebalancing act in the oil and gas sector tempered most negotiations for large scale projects for quite some time. That being said, more stable oil prices no doubt promise opportunities for new deals at some point in the vaguely near future.

As it owns the majority of Sea Lion, some 60% of the main project, Premier could feasibly hive off a significant portion of the Sea Lion cost burden - albeit for a smaller pay-off in terms of production growth.

Or, as some have speculated, the group may now find itself better positioned to advance the project whilst still the majority owner.

It is here that a potentially significant wrinkle of the recent debt refinancing deal may come into play.

Premier agreed to let its lenders will have the right to approve capex and exploration budgets, as well as acquisitions and disposals. It means that the lenders will, at least by proxy, have control of how fast and how far the group’s growth plans progress.

Managing the relationship with lenders will be Premier’s “next battle”, so says Zac Phillips, analyst at broker SP Angel.

The analyst says the refinancing, when it occurs, will be a relief to the Premier Oil share price, but the group’s longer term future will be less certain.

“At its conclusion, the future of the company passes into the creditors’ hands, which given their respective aims and objective (bondholders want their money back), will naturally result in a migration towards lower risk and return projects,” the analyst said in a note.

“The extent to which the company minimises or alters its exploration programmes will also be a function of the ability of the management to convince its new shadow operations committee that risks are worth taking.”

Jefferies, meanwhile, has a somewhat contrasting opinion about Premier’s post refinancing future.

The US broker ‘reworked’ its assumptions about the oiler’s business in light of the improved debt arrangements and oil prices.

And, according to analyst Mark Wilson, these two changes potentially allow Premier to take Sea Lion to a final investment decision (FID) without a farm-down, but, he reckons a deal is a must should oil prices weaken again.

On Wilson’s numbers, Premier Oil could sell off 65% of the Falkland project, leaving it with a 20% stake, in return for a full carry on the US$1.4bn development.

Whatever comes later, however, the completion of the refinancing - which is anticipated in May - will be a significant de-risking event that should mark an end to any uncertainties over Premier’s finances.

Quick facts: Premier Oil PLC

Price: 17.54428 GBX

LSE:PMO
Market: LSE
Market Cap: £147.35 m
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