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Premier Oil’s ‘Super Tuesday’ in detail: Shares rise amid three acquisitions, two farm-outs and a US$500mln placing

The FTSE 250 oiler started 2020 with a bang, with no fewer than SEVEN material pieces of news rolled in a bundle on Tuesday.

Premier Oil PLC - Premier Oil’s ‘Super Tuesday’ in detail: three acquisitions, two farm-outs and a US$500mln placing

Premier Oil PLC (LON:PMO) shares advanced in Tuesday’s deals as an action-packed morning of news point to major shifts in the oiler’s business.

It has outlined more than US$800mln worth of acquisitions in the North Sea, to increase production by almost 30%, supported by a US$500mln fully-underwritten equity funding.

Another acquisition, a new farm-out and a project funding deal will unlock and advance further value creation, allowing the next wave of growth projects to advance.

The company, meanwhile, continues in its process to sell out of the significant Zama oil discovery offshore Mexico.

Operationally, Premier Oil achieved production at the upper end of expectations in 2019 with 78,400 boepd in 2019.

Premier shares gained 17.05p or 16.8% to trade at 118.5p.

The breakdown

  • Acquires Andrew and Shearwater fields from BP for US$625mln
  • Acquires extra 25% of Tolmount field from Dana for up to US$216mln
  • Launches US$500mln equity raise, plus US$300mln bridge if needed
  • Falklands farm-out to Israel’s Nativas Petroleum, opens up Sea Lion
  • Deal agreed to give Premier a full carry at Tuna project, Indonesia
  • Zama discovery sales process ongoing, in talks with possible buyers
  • Production for 2019 comes in upper end of guidance

North Sea acquisitions

Premier agreed a deal with BP to acquire the Andrew Area and Shearwater assets for US$625mln.

The BP assets account for some 23,000 barrels of oil equivalent production per day, and, as such look set to take Premier close to, if not over, the 100,000 boepd threshold.

“The acquisition is highly material for Premier, increasing group production by 23Mboe per day and group 2P by 57MMboe,” said Werner Riding, analyst at Peel Hunt.

“Importantly, the deal will accelerate Premier’s use of its $4.2bn tax losses; we currently value these at $1bn NPV. However, NPV will increase with the accelerated utilisation.

“The BP assets are mid-life, with production forecast to grow until 2022, driven by the Andrew Lower Cretaceous redevelopment. Cessation of production at both Andrew and Shearwater is currently forecast for 2028. BP will transfer the tax history relating to the assets while maintaining the decommissioning liabilities.”

Elsewhere, SP Angel analyst Sam Wahab added: “Whilst we believe that the proposed acquisitions are materially value accretive to Premier and are in line with the company’s stated strategy of acquiring cash generative assets in the UK North Sea, they do come at a considerable cost.

“Assuming the company has to tap into an acquisition bridge facility Premier’s year-end covenant leverage ratio (currently 2.3x against a covenant of 3.0x.) may come under initial focus.

“However, we do see the considerable long-term production and appraisal upside of these assets with the cash flow having the potentially accelerate the deleveraging of Premier's balance sheet.”

Tolmount stake extended

In a deal with Dana, Premier Oil has picked up an extra 25% in its Tolmount field development project which is due for first production later this year.

The Premier-operated Tolmount project, which will now be 75% owned thanks to the Dana deal, remains on-track for first-gas before year end.

It was anticipated that the field would add 20,000 to 25,000 boepd of net production, though that figure should now rise to 30,000 to 32,500 boepd.

Premier Oil chief executive Tony Durrant, in a statement, noted there remained “material upside” at Tolmount.

The development project is said to be on schedule and tracking below budget.

First gas is targeted in late 2020 and it is set to provide substantial further production growth (pre-acquisition it was forecast to yield 20,000 to 25,000 boepd).

In October, an extension to the project was achieved by a discovery well at the Tolmount East exploration target.

Presently, the Premier-led team is assessing potential developments that would connect to the new Tolmount infrastructure, optimised plans are due in the first half of 2020 with a possible sanction decision following in the second half.

US$500mln share sale

Acquisitions announced on Tuesday will be supported by a new equity funding, with some US$500mln to be raised in a fully underwritten share placing and rights issue. The equity funding is being arranged by brokers RBC and Jefferies.

Premier is also setting up a US$300mln ‘acquisition bridge facility’.

On top of that, the company has also agreed an extension of its credit facilities, extending maturity out to November 2023 and relaxing certain covenants on spending and acquisitions.

The timetable sees the equity raise completing in the second quarter 2020, ahead of Q2-Q3 completion for the acquisitions (though the effective date is set as 1 January).

Falklands farm-out clears Sea Lion bottleneck

Premier has also agreed a new farm-out partnership deal in the Falklands where Navitas Petroleum will acquire a 30% stake in the Sea Lion field development project, lowering Premier’s burden to 40% - and thus, it takes the asset significantly closer to project sanction.

The company acquired a 60% interest in Rockhopper’s Sea Lion discovery and nearby exploration acreage way back in 2012.

Whilst much progress had been made since 2012, the project essentially stalled at pre-sanction for a number of years as the majority stakeholder sought a third partner for field development.

Today’s news of the Navitas deal is therefore a significant and long awaited breakthrough.

Navitas is acquiring 10% from Rockhopper and 20% from Premier. In return the Israeli firm will cover a material portion of Sea Lion’s Phase 1 development costs.

As Premier divests a portion of its stake in the Sea Lion field, the company noted it will now be fully funded for its participation in the project’s Phase 1 development, and, thus to Falklands’ ‘first oil’.

Significantly, the growth project now comes back into play albeit with a number of developments in the portfolio further up the queue.

Stick and twist: Indonesia and Mexico

In Indonesia, where in December Premier saw ‘first gas’ at the BIG-P project, the company has now entered into a head of terms agreement with a new investor which intends to take a stake in the Tuna appraisal project by covering Premier’s costs for a two-well campaign.

If successful, such a deal would bring forward another growth opportunity – estimated at about 100mln barrels - without immediate outlay.

At BIG-G – which comprises Bison, Iguana and Gajah Puteri fields – production began in early December. It marked an on schedule and significantly below budget two-year development.

The Natuna Sea Block A gas fields yielded 11,500 boepd in 2019, boosted by the addition of BIG-P in the final weeks of the year.

Elsewhere, in Mexico, the company has decided to divest.

Having enjoyed rapid exploration success, the company has looked to cash in by launching a formal sales process in August.

Earlier, in June, the Zama discovery was estimated to have some 810mln barrels of gross resources (P50m mean estimate), with the estimate range (P90 to P10) pitched at 670mln to 970mln barrels.

The summer upgrade underlined Zama’s credentials as a ‘world class’ project.

Premier intended to keep its other, nearby exploration acreage.

Production and finances

2019 production of 78,400 boepd comes at the upper end of guidance, which was previously pitched at 75,000 to 80,000 boepd.

Before any contribution from the newly acquired assets, Premier sets its 2020 production guidance at 70,000 to 75,000 boepd.

UK North Sea assets account for some 54,200 boepd, up around 16% from the preceding year supported by the ramp up of the Catcher field which averaged 33,600 boepd gross in 2019.

Premier said that its debt pile stood at US$1.99bn, after it repaid more than US$330mln in 2019.

The company said that in 2019 it spent less than it budgeted for development, exploration and abandonment – with expenditure marked at around US$300mln rather than US$340mln – because it released contingencies related to BIG-P, in Indonesia, as well as savings at Tolmount and some deferrals into 2020.

This year, Premier expects to spend US$320mln on production and development (mainly in the North Sea) and it budgets for US$90mln of exploration and US$30mln of abandonment.

It noted that it continues to benefit from UK corporation tax loss and allowances, with some US$4.2bn carried forward into 2020.

Quick facts: Premier Oil PLC

Price: 17.435 GBX

LSE:PMO
Market: LSE
Market Cap: £146.43 m
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