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Why has Premier Oil been hit harder than its peers amid crude price crisis?

Bad timing sees Premier poised with multiple deals and funding activities yet to be closed off as Brent crude plunged beneath US$40 per barrel.

Premier Oil PLC - Why was Premier Oil hit harder than its peers amid crude price crisis

Premier Oil PLC (LON:PMO) appeared particular exposed to Monday’s crude market shock, down around 55% the London oil share fell further than its peers – so what’s the story?

Firstly, it must be noted that Premier has a lot on its plate presently.

Snapshot

  • Set to acquire BP asset package in North Sea
  • US$500mln share sale to fund deal
  • Debt pile amounts to US$1.99bn
  • Cashflow was US$327mln, at US$68 per barrel oil price
  • Field development pipeline to add fields in 2020 and 2021
  • Zama spat feared
  • Falklands farm-out agreed, but non-binding
  • Alaska exploration well underway

North Sea acquisition and US$500mln funding

Timing is potentially disastrous for Premier as the company was set imminently for a transformational asset acquisition in the North Sea.

In January, Premier made a splash with news of acquisition deals worth over US$800mln.

It has agreed a deal with BP to acquire the Andrew Area and Shearwater assets for US$625mln, and, separately, in a deal with Dana, it has picked up an extra 25% in its Tolmount field development project (due for first production later this year).

To fund the deal, Premier proposed to raise US$500mln through a share sale, plus some changes to existing loan terms.

READ: Investors reeling as crude market rout hammers oil stocks

Since then, against speculation that it may struggle, the company in February confirmed that it had secured the backing of its lenders so that it could advance the North Sea deal. Approval is now needed from the Scottish Court of Session to get the scheme formally passed with the hearing scheduled to start on 17 March.

Details of the previously envisaged equity raise was awaited, prior to Monday’s 50-70% share price dive.

State of operations and finances

In early March, the company’s results statement for 2019 confirmed increased profit with the company making US$164mln versus US$133mln in the preceding year.

Free cash flow for the year marked a new company record at US$327mln, up from US$251mln in 2018, with margin per barrel up to US$33 from US$26. Earnings (EBITDAX) increased to US$1.23bn, from US$1.09bn. Premier spent below budget in 2019, with opex at US$11 per barrel and capex totalling US$273mln.

It reduced net debt to US$1.99bn from US$2.33bn at the start of the year and its covenant leverage ratio was reported at 2.3x at the end of December (versus 3.1x at the end of 2018).

The debt repayment was ahead of its own expectations. And management guided that continuing debt reduction remained its priority amid increasingly challenging market conditions.

At that time, in reference to the asset deals, Premier said that the addition of cash generative producing assets was expected to accelerate repayments.

Mexican stand-off over Zama?

A Financial Times report on Monday claimed the consortium including Premier Oil - along with partners Talos and Wintershall – could be facing problems in Mexico as they aim to advance the large 700mln barrel Zama discovery.

Energy companies have accused Mexican state oil firm Pemex of dragging its feet to gain control of the project, according to the FT. The report adds that Pemex is demanding 50% and want to be the operator of the project and negotiations have become bogged down.

Zama is slated to start production by 2023 and Premier has previously stated its intention to sell out of the project, last year launching a formal process to exit its 25% stake in the venture.

Monday’s crude price collapse isn’t likely to strengthen its hand in talks.

Falklands farm-out still to be finalised

Also in January, in parallel with the North Sea deal news, Premier Oil revealed it had entered into a preliminary agreement for a new partnership that promised to unlock the Sea Lion oil field development to production.

A heads of terms was signed with Israel’s Navitas Petroleum which was set to acquire a 30% stake in the Sea Lion.

Premier has for several years sought to share the risks and costs of Sea Lion with at least one additional partner (it is already teamed up with AIM-quoted Rockhopper).

In January, Premier said it expected a sales and purchase agreement would be signed in the first quarter of 2020 and that the deal would be subject to the conclusion of senior debt financing.

With a couple of weeks left in the anticipated schedule, it is another example of particularly unfortunate timing for Premier.

Alaska well drilling

Somewhat non-core but certainly closely followed in the speculative end of the market, the company is a partner in the Charlie-1 appraisal well on Alaska’s North Slope.

Partnered with small cap explorer 88 Energy Plc (LON:88E) it is funding most of the costs of the Charlie-1 appraisal project which is re-evaluating a BP discovery from the 1990s.

It is a follow up to the original Malguk-1 discovery well which hit oil shows over multiple horizons, but, wasn’t tested further at the time.

Charlie aims to intersect up to seven stacked prospects, estimated in aggregate to host some 1.6bn barrels of prospective resources.

Subject to initial results, it is anticipated that the Charlie-1 well may be tested in April.

Quick facts: Premier Oil PLC

Price: 34.9036 GBX

LSE:PMO
Market: LSE
Market Cap: £322.16 m
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