Overview
Premier Oil PLC (PMO) is a London, United Kingdom-headquartered multinational oil and gas exploration and production company, with reserves and resources of around 867 million barrels of oil equivalent as at 31 December 2018. The company has oil and gas interests in Latin America, the Falkland Islands, South East Asia and the North Sea, where the group seeks to invest in high quality opportunities. Within a strict capital discipline framework, it maintains exposure to upside value from successful exploration and has diversified risk by spreading production across three regions - Indonesia, Vietnam and the UK. The company is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index and the FTSE4Good Index Series.

As the company is engaged in the exploration and production of oil and gas, it is entirely engaged in the upstream sector of the industry, in contrast to the downstream refining and retail sector. The strategy of the group is to grow shareholder value by investing in high quality production and development opportunities, where it can realise superior returns and are best placed to increase net asset value. Depending upon prevailing market conditions, it seeks to increase its reserve and resource base through either exploration activity or acquisition of projects where the position of the group is commercially advantaged. The company has a long and established history of executing development projects, with future production growth dependent on Catcher and Tolmount in the UK and the first phase of the Sea Lion project in the Falkland Islands.

Key Statistics



Management

Roy Franklin is the Chairman of the Board; he has more than 40 years’ experience in the industry. Robin Allan is the Director of North Sea and Exploration; he has a deep understanding of the company’s operations as he has held many senior positions at Premier Oil Plc in the last 30 years. Tony Durrant is the Chief Executive Officer of the group; he joined the group in 2005.

Segments

The company's operations are differentiated according to five geographical segments: Falkland Islands, the United Kingdom, Vietnam, Indonesia, and the Rest of the World. More than 66 per cent of the revenue is generated from the United Kingdom while Falkland Islands is not generating revenue at the moment.

Top Shareholders

 
(Source: Thomson Reuters)

Trading and Operations Update

In the first half year to 30 June 2019, the production averaged 84.1 kboepd, up by 11 per cent on the 2018 corresponding period and the company generated free cash flow of $180m during the period. The company reduced net debt to $2.15 billion, helped by high operating efficiency and strong free cash flow. The group reported that it was on track to meet its previously upgraded full-year production guidance of 75-80 kboepd and it expects first gas from the Gajah Puteri, Iguana and Bison fields in Indonesia by end of the year. The company-operated Tolmount development project remained on schedule and within the budget, and the project is on schedule for first gas production by the end of 2020. From 3.1x at the end of 2018, covenant leverage at the end of the period was 2.4x, and the company continued to expect a year-end 2019 covenant leverage of less than 2.3x.

Key Financial Highlights (FY 2018)


(Source: Company Filings)

Driven by outperformance from the Chim Sáo field and full year of production from the Catcher field, group production on a working interest basis averaged 80.5 kboepd compared to 75.0 kboepd in 2017, indicating that the operational delivery of the group remained strong with the company achieving its best full year of production despite material asset sales. Strong production led to higher cash flows and a return to profit, amid oil price volatility throughout the year, as prices increased during the first three quarters of 2018, peaking at $86.2/bbl, before falling to $50.2/bbl. From continuing operations (excluding Pakistan), sales revenue increased from $1,043.1 million for the prior year to $1,397.5 million, while revenue from all operations (including Pakistan) increased to $1,438.3 million (2017: $1,102 million). Even as absolute operating costs increased to $500.0 million for 2018, compared to $455.4 million for 2017, total operating costs were below the low end of $17-$18/boe guidance at $16.9/boe (2017: $16.4/bbl), reflecting cost reduction initiatives, successful contract renegotiations and strict management of discretionary spend. Due to higher production and realised prices during the year, EBITDAX for 2018 from continuing operations was $882.3 million against $589.7 million for 2017. Profit after tax was $133.4 million, rising from a loss of $253.8 million reported in 2017. This resulted in basic EPS of 17.3 cents, versus a loss of 49.4 cents in 2017, reflecting increase in sales revenue and the subsequent impact on operating profits. Driven by higher production, sales volumes and realised prices, cash flow from operating activities increased considerably from $475.3 million in 2017 to $777.2 million. Due to strong cash flow generation and the successful conversion of the group's convertible bond notes during the year, the company reduced its net debt by $393 million to $2,330.7 million, indicating that debt reduction remains a key corporate priority.

Financial Ratios


 (Source: Thomson Reuters)

Ratios Commentary

Helped by strong production and cost efficiency, the group returned to bottom-line profit in 2018. This reflected in profit margins as well, which rose considerably during the year. Operating margin rose to 38% in 2018 from 3.2% in 2017. Company reported a positive return on equity of 12.8%, from a negative return of 37.9%. The liquidity position improved significantly and was above the industry median at the end of the year. A small difference between quick and current ratio signifies a large part of current assets are held in liquid assets. Although the company is still more leveraged than its peers, it improved its position considerably in 2018. The company has also improved its asset turnover ratio, reflecting better utilisation of resources.

Valuation Methodology
Method 1:Price/Book Value Multiple Approach (NTM)

To compare PMO with its peers, Price/Book Value multiple has been used. The peers are EnQuest PLC(NTM P/B was 0.36), Genel Energy PLC(NTM P/B was 0.42),Cairn Energy PLC(NTM P/B was 0.74), Tullow Oil PLC(NTM P/B was 1.14) and Kosmos Energy Ltd(NTM P/B was 2,31). The mean of P/B (NTM) of the company’s peers was 1.00x (approx.).

Method 2:Price/Earnings Multiple Approach (NTM)

To compare PMO with its peers, P/E multiple has been used. The peers are EnQuest PLC(NTM P/E was 2.38), Genel Energy PLC(NTM P/E was 4.91),Tullow Oil PLC(NTM P/E was 10.50), Hurricane Energy PLC(NTM P/E was 10.74) and Cairn Energy PLC(NTM P/E was 18.45). The mean of P/E (NTM) of the company’s peers was 9.38x (approx.).

Share Price Commentary


Daily Chart as at 31-July-19, before the market close (Source: Thomson Reuters)

On July 31, 2019, at the time of writing (before the market close, at 12:25 pm GMT), PMO shares were trading at GBX 83.74, up by 4.75 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 146.90/GBX 54.70. Stock’s average traded volume for 5 days was 5,745,121.40; 30 days – 9,159,578.37 and 90 days – 9,341,418.53. The average traded volume for 5 days was down by 37.28 per cent as compared to 30 days average traded volume. The company’s stock beta was 3.40, reflecting significantly more volatility as compared to the benchmark index. The outstanding market capitalisation was around £663.31 million.

Risks Assessment and Growth Prospects

Oil and gas prices can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. While the group engages in oil and price hedging programmes to underpin its financial strength and protect developments and operations, it is under the risk that it will not be able to execute a satisfactory oil hedging programme due to low forward oil prices. The failure to maintain the schedule of Tolmount project and reliance on the performance of Catcher asset also poses a significant risk from uncertain geology, reservoir and well performance. Although the company seeks to maintain a portfolio of assets which includes operations in both higher and lower risk environments, operations and earnings can be affected by adverse developments in politics, security, laws and regulations. However, the company is well placed to deliver maximum value from its existing production and sanctioned developments, as the company has focused on operational delivery together with cost and capital discipline. The company has reduced its debt considerably and seeks to improve its leverage position further, helped by continued high operating efficiency from its producing portfolio, and is on target to meet its debt reduction target for the full year. Helped by Catcher Area, strong performance is expected to continue in the second half of 2019. Moreover, the demand for Indonesian gas from Singapore remained robust. Under the long term gas sales agreements, significant opportunities remain to develop and deliver additional resource into the Singapore market, underpinning company's confidence in the longer-term cash flow generation potential of this asset.

Conclusion

By maximising value from its low cost, stable production base, the group seeks to generate sustainable cash flows and provide returns to shareholders. The group is reducing debt faster than anticipated, helped by higher than forecasted production and free cash flow. The low-cost base and a disciplined Capex programme undertaken by the group has resulted in strong operational performance and will further help in generating material free cash flow.
Based on the decent prospects, and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 79.94 (as on 30 July 2019) with low double-digit upside potential based on 1.00x NTM Price/Book Value (approx.) on FY19E Book Value per share (approx.) and 9.38x NTM Price/Earnings (approx.) on FY19E Earnings per share.
 
*The buy recommendation is valid for the current price as covered in the report (as on July-31-19).
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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