When Premier Oil PLC (LON:PMO) reset its financing arrangements earlier this year investors asked themselves what it would mean for the group’s strategy going forward.
At face value it was simple, the plan was to use the breathing room secured in the refinancing to continue its production growth to garner greater cash flow and thus make it easier to relieve the group’s debt burden - which at the last count stood at nearly US$2.8bn.
Since then though, there have been signs that Premier might be looking to pick up the pace in its debt repayment strategies.
Premier last week confirmed rumours that it was selling out of the Wytch Farm oil field, on England’s south coast, through a deal that unlocked some US$275mln of funds that will be put straight to debt repayment.
The group’s 33% stake in the UK’s largest onshore field was worth 5,100 barrels oil equivalent per day to its production profile - which averaged 82,100 boepd in the first six months of this year.
Now another deal is rumoured, with a Reuters report claiming a 23.5% stake in the 3,200 boepd Babbage field is set for the auction block.
The Reuters report claimed that Premier also wants to sell a 25% stake in the Cobra discovery, where an appraisal well is due next year.
Premier hopes to make US$100mln from sales
The Babbage and Cobra stakes were acquired last year, as make weights in Premier’s deal with Germany’s E.ON which brought in new ‘core’ North Sea assets Elgin-Franklin, Tolmount and Huntington.
Given Premier’s debt-pile, there’s nothing particularly remarkable about a divestment of non-core assets.
What investors may wonder, however, given Premier’s post refinancing strategy, is which assets can be deemed core and which are disposable.
Where does Falklands Sea Lion fit in Premier’s strategy?
So, what does it all mean for the 520mln barrel Sea Lion field in the Falklands, which will cost US$1.5bn to build.
Will Premier ‘green light’ another capital intensive oil field development, given that its lenders will now have to approve new projects.
Does Premier still want/need an extra development partner to cover more of the cost? Or will the Sea Lion field find itself be on the auction block?
Premier presently carries the majority of the capital burden for Sea Lion, with a 60% stake in the field, but it has enough project equity to do a deal and still retain a material stake.
Rockhopper raised investor hopes
Rockhopper Exploration Plc (LON:RKH), Premier’s partner with the other 40% of Sea Lion, recently stoked investor hopes that the project may be advancing soon with a final investment decision now anticipated next year.
Earlier this month Rockhopper’s chief executive Sam Moody said Sea Lion is the primary focus for the company for the remainder of the year.
In the oil firm’s interim results statement, Moody said: "Good progress has been made on a range of commercial, fiscal, regulatory and financing matters associated with the Sea Lion project.”
Rockhopper also told investors that talks have begun with the UK's export credit agency, UK Export Finance, over a proposed US$800mln senior debt financing for Sea Lion.
It said talks are also progressing with potential contractors for the project, for US$400mln of financing, and that non-binding proposals have been received for a significant proportion of funds, with further proposals expected in the coming weeks.
Premier, in its interims back in August, similarly said that it had made progress towards securing “appropriate funding and commercial solutions”, whilst highlighting that “discussions are ongoing with both potential providers of export credit finance and supply chain contractors”.
Final investment decision on the horizon
So, at some point, between now and the final investment decision, shareholders will get a decisive indication whether Premier -or perhaps more pertinently its lenders – have the appetite for more indebtedness to fund Sea Lion.
Are the new divestments reducing debt to make room for new commitments? Or is the plan simply to get rid of the debt mountain?
It is probably also worth pointing out that Sea Lion isn’t actually next in the queue for Premier, as the Tolmount gas project in the North Sea is due for project sanction in the first half of next year.
Sea Lion isn’t Premier’s biggest potential growth project either, given that the Zama well discovered a possible billion barrels offshore Mexico this summer (albeit that project is still in a much earlier stage).
The refinancing was a vital step that secured Premier Oil’s financial future, and understandably it was a deal that came with strings attached.
Existing assets continue to grow production volumes and slightly better and more stable cash flow is supporting the business, but, plainly, for investors looking at Premier for growth there are still plenty of questions that remain unanswered.
More deal making is likely, so investors must see how the portfolio looks once the shake-up is done.