Premier Oil Plc (PMO)

Premier Oil Plc is a London-headquartered energy sector company with significant operations in the exploration and production of oil and gas. The group is into upstream oil and gas business. The outstanding market capitalisation of the group ranks it among the small-cap businesses listed on the main market of the LSE and a constituent of FTSE All-Share and FTSE 350 indices.

Recent Developments
Increased group’s resource estimate of the Zama field offshore Mexico. In the exchange filing made by the energy group with LSE as on June 27, 2019, the group reported that, as per the data received from successful 7 Zama appraisal campaign, comprised of appraisal of Zama-2 and Zama-3 and vertical stack of Zama-ST1 provided that Zama-3, has identified the lateral continuity of reservoir around 2.4 km to the south of Zama-1 as per the sands encountered at the upper end of expectation. This was a significant Zama resource upgrade.

Trading and Operational Update
In the statement, the group mentioned that on a year-to-date basis, production surged by 14% against the corresponding period of the previous financial year and stood at 85.1 kboepd. Full year production guidance for FY19 increased to 75-80 kboepd.

The group’s next UK premium project Tolmout is progressing as scheduled and broadly in line with expected budget. Block 7 Zama (Mexico) appraisal campaign results are favourable and will be completed in June. Group’s net debt during the reported period was narrowed to $2.25 bn and for 2019, net debt would be at the top of the guidance range of $250mn to 350 mn given by the group, at current oil prices. During the period, the group was benefited by the surge in crude oil prices and helping them to increase their hedging position to prevent their future cash flows.

Fundamental Ratios
From the profitability standpoint, the company's Return on Equity (ROE) stood at 12.7%, whereas the industry average ROE stood in negative. From the liquidity standpoint in terms of current ratio (CR), the group is well positioned to meet its short-term liabilities as CR of the company stood at 1.43x, whereas industry median stood at 1.02x  However, the group has substantially high debt proportion to the total capital structure as Debt-to-Equity ratio of the company stood at 2.4x, whereas industry median is 0.44x.

Market Ratios
At the current price level, trailing twelve months (TTM) PE (x) of the company stood at 8.29x whereas industry TTM PE stood at 10.08x and TTM Price-to-Book value per share (BPS) of the company stood at 0.8x against the industry median of 1.03x. Both the valuation ratios indicate that the stock is currently trading at a lower valuation as compared to their peer group companies.  

Stock Price Chart

Daily Price Chart (as on June 28, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close, at 01:28 PM GMT), shares of the PMO were quoting at GBX 77.9 and declined around 1.4% against the previous day closing price. In the year-ago period, shares of the PMO have touched a 52w high of GBX 146.90 and a low of GBX 54.70. And, on a year-to-date basis, the stock was up by approximately 18%.

Valuation Methodology


Conclusion
As per the latest trading update available, the group’s reported production and free cash flow were beyond the forecast for FY19 and they have narrowed their debt during the FY19. In the past few months, the group was benefited by the surge in crude oil price in the international market and the crude price would move up further as tension heightened between US and Iran, which could push prices up in the wake of lower supply to meet the existing demand. However, the group is exposed to a variety of risks ranging from the global slowdown, plunge in crude oil prices, increase in borrowing costs and many other macro events.

However, the above discussed fundamental and market ratios, indicates that the stock was trading at a lower valuation against the peer group. Therefore, based on the fundamental measures, and considering potential risks and valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the closing price of GBX 78.96 (as on June 27, 2019), with single-digit upside potential, based on the 2.75x NTM Industry Median EV/EBITDA (approx.) on the FY19E EBITDA (approx.).
 

Rose Petroleum Plc (ROSE)

Rose Petroleum Plc is engaged in the exploration and production of oil and gas together with mining of gold, copper, silver and uranium in Mexico. It shares are listed on the Alternative Investment Market of the London Stock Exchange and a constituent of FTSE AIM All-Share – Oil & Gas. 

Recent Developments
In the exchange filing made by the group as on June 28, 2019, the group notified that Mr Rick Grant appointed as the Non-Executive Director of the company with immediate effect. He is carrying a 40-years of experience in the Oil and Gas industry.

Financial Highlights
As on June 28, 2019, the group reported its financial results for the period ended December 31, 2018. During the year under consideration, the group's operating loss significantly narrowed to US$744k from US$3,513k of operating loss recorded in the year-ago period. This was primarily driven by a significant reduction in the administrative expenses from US$2,063k recorded in the FY17 to US$1,646k in FY18 and gained US$1,084K from forex operations against the loss of US$1,378K reported in the year-ago period. The loss for the FY18 from continuing operations stood at US$761k against the loss of US$3,512k recorded in the year-ago period. Per share loss from the continuing operation lowered substantially to US$0.58c from US$6.22c recorded in the year 2017.

During the year under consideration, net cash outflow from the operating activities lowered to US$1,676k from US$1,965k reported in the year-ago period. Net cash outflow from the investing activities elevated to US$1,135K from US$998k in the year-ago period, and Net Cash inflow from the financing activities stood at US$1,264K as the group received US$1,345K proceeds from the issue of shares.

Stock Performance

Daily Price Chart (as on June 28, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close, at 02:50 PM GMT), shares of the ROSE were standing at GBX 1.42 and added 27.2% from the previous day closing price. In the past 52wks, shares of the ROSE have touched a high of GBX 3.90 and a low of GBX 1.0.

Conclusion
Despite a humongous rally in the stock price in the day’s session, shares were still quoting considerably below the 200-day, and 60-day Simple Moving Average prices, which still indicates that the stock is in bearish price zone. However, at the time of writing, the 14-days RSI of the stock was hovering in the overbought zone, which indicates the stock could witness some correction in near-term.

Also, the group is exposed to volatility in the crude oil prices and forex, as the company is in its initial phases of exploration, any negative swing in the crude oil prices could impact the group substantially. Therefore, based on the above-discussed measures, we have given a "Watch" recommendation at the current price of GBX 1.42 (before the market close, as on June 28, 2019).
 
*Speculative Buy recommendation is also valid for the current price as on June-28-19.

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