Premier Oil PLC

HSBC analysts bullish on mid-tier oil stocks after market sell-off

With a more bullish view on the oil and gas sector HSBC's Peter Hitchens today upgraded five mid-tier E&P stocks - Premier Oil, EnQuest, Exillon Energy, Heritage Oil and Melrose Resources.


The recent market-wide sell off mean oil stocks are now more attractive, according to analysts at HSBC.

This was the cue for upgrades for five mid-tier E&P stocks. “Shares are being supported by a discount to their net asset values and should start to see support from recent asset transactions,” added analyst Peter Hitchens.

“The short-term driver of performance will remain oil prices but we expect to see OPEC react to create a floor at about US$90 a barrel. With a base established we believe there is an opportunity for significant potential shareholder returns through exploration drilling, which the market is ignoring in the current turbulent times.

“The sector is now likely to see a substantial increase in exploration activity, after a quiet start to the year: With a modicum of success, this should lead to rising asset valuations.” 

In light of its more bullish view on the sector, and last week’s deal to acquire EnCore Oil (LON:EO.), Hitchens today upgraded Premier Oil (LON:PMO) from ‘underweight’ to ‘overweight’.

Other E&P stocks upgraded to ‘overweight’ by HSBC today were North Sea firm EnQuest (LON:ENQ), Russia focused Exillon Energy (LON:EXI), Heritage Oil (LON:HOIL) and Melrose Resources (LON:MRS).

Meanwhile the bank also repeated ‘overweight’ ratings on Afren (LON:AFR), Ophir Energy (LON:OPH) and Salamander Energy (LON:SMDR), while highlighting that each firm has exciting exploration programmes coming up.


Premier Oil: Upgraded to ‘Overweight’ target price raised from 413 to 437p (current price 368p)

The mid-tier oil stock was the talk of the town last week as it unveiled a £221 million deal to buy EnCore Oil. 

The deal gives the firm the operatorship of the Catcher oilfield development in the North Sea and increased its stake in the project to 50 per cent – as well as adding a 16.6 per cent stake in the Cladhan oil discovery to the group’s portfolio.

Today Premier confirmed the start of oil production from the Chim Sáo field in Vietnam. Oil output from the field is expected to plateau at around 25,000 barrels of oil per day.

Focussing on the benefits of the potential EnCore acquisition, Hitchens said: “(The deal) will help Premier Oil to consolidate its position in the Great Catcher development in the UK North Sea. This will also allow the group to increase its exploration portfolio and see an increase in activity.”

 He added: “The company has also made a rare move by setting a target for reserves found through exploration in October 2009. The company wants to add 200 million barrels of oil by the end of 2014. 

“At present the company is on track but perhaps more encouragingly, the resources found to date have been ahead of target. These resources should be converted to reserves over time. Achieving this should add significant shareholder value.”


EnQuest: Upgraded to ‘overweight’ target price raised from 110 to 125p (current price 99.5p)

Hitchens reckons this North Sea oilfield developer is undervalued. Today he claimed the re-development of the Alma field – which was one of the first UK oilfields to be abandoned – is proving to be ‘bigger and better’ than he had previously envisaged. 

That said, the group has been under some pressure recently after it reduced its production targets for this year after some disappointing wells, he added.

“Despite this little blip, the company is continuing to build its business, as demonstrated by the redevelopment on the Alma field (which as the Argyll field was one of the first UK fields to be abandoned),” Hitchens said.

He added: “the higher oil price and EnQuest’s operational ability should allow this to be a viable development and provide the next leg up in the group’s production profile.”

The analyst points out that after the recent fall in the share price his new 125p price target gives investors a potential return of 40 per cent.


Exillon Energy: Upgraded to ‘overweight’ target price raised to 360p (current price 239p)

Currently trading at a 66 per cent discount to HSBC’s new 360p price target Exillon Energy is rated as a ‘buy’ by Hitchens, despite the group’s recent problems in West Siberia.

Completion problems, relating to a faulty cement job, has led to a delay and consequently meant that production targets will not be met. However the analyst highlights that Exillon’s new management team is starting to make an impact on the business. 


Heritage Oil: Upgraded to ‘overweight’ target price raised from 214 to 282p (current price 243p)

Two wells on the Miran area of Kurdistan are key, said Hitchens. The first well, drilling began recently, is an appraisal of the Miran West gas discovery and it will take seven months to complete, while the second will be an exploration well on the nearby Miran East prospect.

The analyst said: “we believe that should everything live up to expectations, this could allow the company to conduct a major drilling programme in order to prove up sufficient reserves to start to look to monetise the assets, which we believe is the key challenge for Heritage Oil.

“The company will also start to ramp up activity around the world. In 2012 the company is likely to start exploration programmes in Malta, Mali, Pakistan and Tanzania,” he added.

As he upgraded his rating and target price Hitchens emphasised that Heritage Oil shares have held up very well in the current stock market downturn.


Melrose Resource: Upgrading to ‘overweight’ target price raised to 235p (current price 112.75p)

A 60 per cent fall in the year-to-date has left Melrose Resource at a substantial discount to HSBC’s asset valuation and going forward – with some future exploration success - this discount should gradually ease, Hitchens said.

He believes that eventually the major trigger for Melrose to outperform its peers will come from exploration success, but for the time being only one high impact well, in Egypt, will be the only potential opportunity.

 “The recent sharp weakness has left the shares trading at a substantial discount to our asset valuation of 300p a share,” the analyst said. “With its limited short-term exploration upside of 36p and applying a discount of 30 per cent, we derive our new target price of 235p. 

“This gives investors a total potential return of 133 per cent.”


Quick facts: Premier Oil PLC

Price: £0.88

Market: LSE
Market Cap: £729.23 m

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