Premier Oil PLC – Raising US$530 million to strengthen the balance sheet.

Premier Oil PLC (LON: PMO) is a FTSE All-Share London, United Kingdom-based multinational Oil & Gas Exploration, and Production Company.

Investment Rationale – Speculative Buy at GBX 18.83

• Over the past four years (FY15 – FY19), the Company’s revenue has surged from US$1,067.20 million in FY15 to US$1,584.70 million in FY19, representing a Compounded annual growth rate of 10.39%.
• Gross margin and net margin in FY19 were 78.4% and 9.8%, respectively, which was higher than the industry median.
• EV/Sales and Price/Cash Flow multiples are currently undervalued compared to corresponding multiples of the Oil & Gas industry.
• The stock is trading nearly at a 52-week low while RSI-14 giving the oversold signal, a short-term rebound can be expected.

Risk Assessments

• The decline in oil prices can impact the cash generation and profitability of the Company.
• The performance is also dependent on the production stoppages, equipment failures and supply chain amid Covid-19 crisis.
• The Company can face liquidity risk with insufficient borrowing facilities.

Recent News:

20 August 2020: PMO is planning to raise US$230 million in equity to fund the proposed North Sea acquisitions from BP. In addition, US$300 million of new equity would also be raised to reduce debt.

Interim Report (for the six months ended 30 June 2020)

 (Source: Company Website)

The major highlights of the H1 FY20 report, released on 20 August 2020 were as follows:

• Despite the commodity price collapse, the Company generated a decent operating cash flow of US$324 million (H1 FY19: US$545 million).
• Production averaged 67.3 kboepd in H1 FY20 as against 84.1 kboepd in H1 FY19, due to an unplanned 20-day shutdown on Catcher, and the cessation of production from Huntington and Kyle.
• At the current forward curve, the Company projects to be free cash flow positive in FY20.
• Financial Position: As of 30 June 2020, net debt amounted to US$1,973.9 million with cash resources of US$139.7 million and undrawn facilities of US$329.3 million.

One Year Share Price Chart

 1-Year Chart as of 3 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The proposed refinancing of debt facilities and BP acquisition will significantly bolster the Company’s operations and balance sheet. It will also ensure additional free cash flow generation. Moreover, with rising near-term production, PMO should be able to reinvest in growth projects to deliver value for shareholders. Moreover, the Company is also targeting to be carbon-neutral by 2030. Stock 52 week High and Low were GBX 120.70 and GBX 10.02, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on Premier Oil PLC at the current market price of GBX 18.83 (as on 3 September 2020, before the market close at 9.10 AM GMT+1) with lower double-digit upside potential based 2.42x Price/NTM Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.). 

*All forecasted figures and Peer Information have been taken from Refinitiv, Thomson Reuters.

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