Premier Oil PLC - Decent Growth Opportunities, Agreed Revised Term with BP and Agreements with Creditors

Premier Oil PLC (LON: PMO) is a FTSE All-Share London, United Kingdom-based multinational oil & gas exploration, and production company.

Recent News
On 5^th June 2020, the Company has agreed revised payment terms for its North Sea asset acquisition from BP PLC and has agreed to pay cash of USD 210 million on completion. Before the crash in the oil market, the Group agreed to pay USD 625 million in 1^st January 2019. As per the latest agreement, BP would retain 50 per cent of the current Andrew Area abandonment costs and 100 per cent of the current Shearwater abandonment costs, as the Company’s abandonment obligations were decreased to approximately USD 240 million. The Group also reached a settlement agreed with ARCM (Asia Research Capital Management), to withdraw its appeal of the Court’s judgment approval of the acquisition and has undertaken to support the deal (BP PLC acquisitions) and the Stable Platform Agreement. The Oil & Gas producer, Premier Oil will also issue 82.2 million new shares, reflecting a 8.91 per cent stake, at ARCM at a price per share of 26.69 pence, a 9.64 per cent discount to the volume-weighted average price over the last 5 days, to fund part of the proposed BP acquisitions.

Traditional and Operations Update (as on 13^th May 2020)
The Company provided the operations and trading update for the period 1 January to 30 April 2020. The Group estimated capex and opex savings and deferrals secured of USD 240 million for the full-years 2020. PMO had retained its liquidity, with USD 330 million of undrawn facilities and approximately USD 160 million of unrestricted cash. On 30^th April 2020, the net debt decreased to USD 1.91 billion.

Share Price Performance
 
1-Year Chart as at June-05-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 5th June 2020, before the market close (at 9:50 AM GMT+1), Premier Oil PLC’s shares were trading at GBX 35.37 and were up by 11.23 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 120.70/GBX 10.02.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock.

Valuation Methodology

 
Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the Price/Earnings, EV/EBITDA and Price/Book multiples of the PMO were 1.7x, 2.3x and 0.3x, respectively, and the same multiples were lower as compared with the Oil & Gas Producers industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts
The Company will execute new partnerships for Sea Lion and Tuna. The group will deliver a pipeline of high impact exploration wells, complete and integrate UK acquisitions as well as minimise Carbon footprint.

Conclusion
With BP for the proposed acquisition of the Andrew Area and Shearwater assets, the Company has agreed revised terms, which are materially valued accretive for the Company.The Stable Platform Agreement will provide the Group’s existing credit facilities. Tolmount East is well-positioned for sanction decision by year-end 2020. The Group continued to generate free cash flow in the period and expect to be broadly free cash flow neutral for the full year (based on the current forward curve). The Group is benefitting from the hedging programme and taking effective action to reduce the expenditures. The Group remained discipline, while investing in the new projects, as the recent macro-economic factors are making the environment more challenging.

Based on the above rationale, which are supported by valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 31.80 (as on 4^th June 2020) with lower double-digit upside potential based 4.30x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.).
 
EnQuest Group PLC – Reported loss last year, albeit not materially impacted by COVID-19 so far.

EnQuest Group PLC (LON: ENQ) is a FTSE All-Share listed Company, which is involved in the production and development of oil and gas. Its operations are focused in Malaysia and the UK North Sea. As of 31^st December 2019, the Group had an interest in licenses of 17 UK production operations.

Operation Update (for the four months to end April 2020)

(Source: Company Website)

As on 21^st May 2020, the Group reported production of 65,938 Boepd in the first four months of FY20, which was in line with expectation. Therefore, the production guidance for FY20 remains unchanged in the range of 57,000 to 63,000 Boepd. Moreover, the performance is materially unimpacted by the COVID-19 disruption. As at 30^th April 2020, the Group had available facilities of USD 289 million with reduced net debt of USD 1,364 million (31^st December 2019: USD 1,413 million). The Group continues to target the free cash flow breakeven of approximately $27/Boe for FY21. To mitigate the challenging scenario, the Company has implemented a cost reduction programme which is progressing well to achieve the desired target for the free cash flow. Further, the Group has been closely monitoring the evolving situation of COVID-19 and enhanced its procedures to manage the potential risks.

Share Price Performance

Daily Chart as on 5^th June 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

EnQuest Group PLC’s shares were trading at GBX 13.90 on 5^th June 2020 (before the market close at 8.30 AM GMT+1), which was up 6.43% against the last day closing price. Stock's 52 weeks High is GBX 30.00 and Low is GBX 7.07.
From the technical standpoint, its shares were trading well below its short-term support level of 200-day simple moving average prices, which reflects a downward trend in the stock and carrying the potential to move down further. Moreover, the relative strength index (RSI) indicator for 14 days is hovering close to the overbought situation.

Valuation Methodology

 
Risk Analysis
The nosedived demand in oil and price-war scenario amid the COVID-19 restrictions has led to oil price slump, which can affect the profitability in FY20.

Conclusion
During the financial year 2019, the Group reported a significant decline in bottom-line items of the financial statement. Moreover, the production and profitability are likely to remain impacted amidst the COVID-19 mayhem and oil price slump. Regarding liquidity, the Group has a substantial amount of facilities in place and also reduced net debt during the first quarter. Further, the Company has been taking proactive steps to reduce costs through the cost reduction programmes and continuously targeting to bring down the free cash breakeven to stay buoyant. However, the stock seems overstretched from the Relative Strength Index indicator to invest currently.
Over the past three years (FY16 to FY19), revenue increased by 24.3 per cent, albeit the EBITDA declined by 53.9 per cent.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of GBX 14.22 (as on as on 5^th June 2020, before the market close at 7.14 AM GMT+1), while we look for any upcoming catalysts in the near term.
 
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 5^th June 2020).

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