Premier Oil's [PMO] share price almost doubled in June, going from 30p a share at the start of the month to 55.14p by 23 June — an 83% upside. Driving these gains were a recovery in oil prices and an update on new acquisitions.
While Premier Oil’s share price has subsequently been on a downward trend, for the bargain hunter it is one of the cheapest on the FTSE 100. Trading around the 35p level, the stock is still down around 66% this year-to-date (as of 18 August’s close), and offers exposure to oil markets at a fraction of the cost of BP.
Like BP, however, Premier Oil's share price is volatile and subject to changes in the price of oil. The company is also heavily in debt, which has sparked opposition to recent deals and will be a deciding factor in which way Premier Oil's share price goes post-earnings.
So, what should investors expect in Premier Oil's half-year results?
When is Premier Oil releasing earnings results?
Can Premier Oil reduce its debt pile?
Premier Oil’s share price is being severely limited by the amount of debt the firm is currently carrying. Any sign in the half-year results that the company is managing and reducing this debt could go some way towards boosting the stock.
A closer look at Premier Oil's balance sheet shows that it was lumbered with a total of $2.9bn in debt in the most recent quarter. With $198.1m in cash and an operating cash flow of $1.11bn, it is not even close to covering that debt pile. Considering Premier Oil’s market cap sits at circa $312m, this is a big problem.
Premier Oil's debt posted in its recent quarter
While Premier Oil has divested some assets, seemingly in an effort to control this, the oil major has also picked up new ones. Chief among these is a deal to buy BP’s Andrew Area and Shearwater assets for $565m. Premier Oil had been looking at stumping up $625m for the assets, however, the drop in oil prices during the pandemic enabled it to pick up a discount.
Premier Oil insists that the purchases would add more than $1bn in free cash flow by 2023, but the North Sea spending spree came up against opposition from creditor Asia Research and Capital Management (ARCM) in January. The hedge fund argued that proposed acquisitions would add millions of dollars to Premier's liabilities in the North Sea. A way forward was only found after an agreement to spread payments over several years.
ARCM have a point, and there's no getting away from the fact that Premier Oil's balance sheet is heavily leveraged. The fields in question are relatively mature and there will be decommissioning costs down the line. That makes any news that Premier Oil is finding ways to reduce its debt a must for shareholders in the results.
What to expect in half-year earnings?
In a trading statement released 15 July, Premier Oil said it expects total revenues to “be in the order of $530m”, with net debt reduced to $1.97bn from the $1.99bn seen on 31 December 2019. It also expects to see a $300-$500m non-cash impairment charge due to lower oil prices, with $200m written off following exploration of the North Falkland basin that will now not be developed.
If Premier Oil follows on from the trading statement with strong earnings results, Premier Oil’s share price could gain. One factor that could help is the partial recovery in the price of Brent crude, which is trading around $44.80 a barrel, having slumped to $19.33 a barrel in April — it had started the year at $66 a barrel.
Premier Oil's expected total revenue for H1
So, time to buy Premier Oil?
Premier Oil's share price is trading 15.7% below its 50-day average of 40.17p and 22.8% below its 200-day average of 43.85p. Given that these are both above the 40p level, there does seem to be some potential upside in the stock. How much, though, will depend on its results and the direction of oil markets over the coming months. A surge in oil prices could see Premier Oil’s share price gain as well.
Among the analysts, there seems to be a degree of confidence in the future of Premier Oil's share price. An average 52.82p 12-month price target from the 10 analysts offering targets on the Financial Times would see an impressive 56.04% upside on Premier Oil's share price as of 16 August’s close.
|PE ratio (TTM)||1.86|
|Quarterly Revenue Growth (YoY)||-7.7%|
Premier Oil share price vitals, Yahoo Finance, 19 August 2020