Earnings

How to trade Premier Oil's share price on the eve of half-year results

Back in March of this year, Premier Oil [PMO] reported semi-annual losses of -0.05 per share for 2018, underperforming figures for the same period the year before by 61.54%.

In December the company reduced its forecast for operating costs in 2019 down to $12 (£9.8) per barrel on the back of its $2.3bn (£1.85bn) debt at the time. With Premier Oil’s next earnings report due on 22 August, how is the independent UK oil operation’s share price – which is listed on the LSE and the FTSE 250 Index – likely to react?

 

Taking action

Premier Oil has been taking direct action to tackle its debt, with new North Sea activity at its Cater Area oil field helping to reduce the debt pile. The firm are also expecting formal approval this month on two Catcher satellite fields, designed to help maintain production at 66,000 barrels per day.

Oil prices have experienced a turbulent time over the past 18 months, and if cash flow can move up while net debt decreases, then investors may start to view the company as a possible high reward: risk play, relative to other FTSE 250 constituents. So what should investors be looking for when results are announced?

 

Earnings reveal

Investor interest will be focused firmly around the balance sheet. Currently total debt/equity (MRQ) is 248.73 based on a total debt of $2.65bn (£2.17bn), which is significant even in comparison to major industry players such as BP [BP], whose debt/equity (MRQ) ratio is just 65.08.

 

Market cap £594.35m
PE ratio (TTM) 4.66
EPS (TTM) 15.50
Operating margin (TTM) 30.93%

Premier Oil share price vitals, Yahoo finance, 21 August 2019

 

Even though oil prices have shifted toward an upwards trend thus far this year, poor economic data will no doubt split investors. There will be those willing to take a punt on there being a high reward in the future, while others with a more risk adverse outlook will know how volatile the oil and gas industry can be, especially in light of unpredictable global political situations.

 

Taking stock

Premier's P/E ratio is low, currently standing at 4.62, significantly lower than industry peer BP – whose ratio comes in at 13.96 - and a potential indicator that shares are ripe for a resurgence, according to PMO bulls. 

However, if the earnings report does show debt really is on the way down, a share price hike could ensue as buying activity increases, so a short-term investment made quickly enough could benefit those that are prepared to take the plunge.

Meanwhile, wider industry consensus suggests the stock might be a good long-term investment too.

4.62

Premier Oil stock's P/E ratio, according to Yahoo Finance

 

Industry analysis

Using the discounted cash flow model to estimate the company’s value, analysts at Simply Wall St suggest the current share price could be undervaluing Premier Oil by as much as 36%. This is based on its conclusion that the intrinsic value per share is £1.10 compared to the market price - at the time of calculation – standing at £0.70p. 

As shares continued to tumble through last week, and are currently trading around 70.12, down 34% from April’s high of 106.20, many industry analysts are taking a similar view when it comes to the undervaluation of the stock. 

As of 10 August the consensus forecast amongst 15 investment analysts polled by the Financial Times was that the company will outperform the market, with both UBS and Peel Hunt rating it as a clear ‘buy’. 

The latter issued a broker note earlier this month reaffirming its ‘buy’ rating and raising its price target to £1.65p.

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