On Wednesday Premier Oil (LSE:PMO) announced a ‘world class’ discovery at their Zama-1 exploration well, part of their joint venture offshore operations in Mexico. Preliminary analysis estimates there could be in excess of 1 billion barrels at Zama, which could extend into a neighbouring block. Premier Oil holds 25% of the block. The share price rocketed 35% on the day of RNS release from a recently beaten-down 46.25p to highs of 64.25p.
News of the discovery got a mention again today as part of Premier Oil’s half yearly trading and operations update. Compared to the stunning news from Mexico 24 hours earlier, the trading update was a bit of a damp squib without a great deal of new information for shareholders.
Positive highlights of the update included improved production total of 82.1 kboepd with the full year guidance of 75 kboepd being maintained. This is set to increase substantially once Premier oil’s new pride and joy, Catcher, is in position and pumping oil. Sail away for Catcher has slipped very slightly and it’s expected to leave Singapore next month once it’s completed initial tests but shareholders are reassured that it’s still on target for first oil in 2017. The journey from Asia is expected to take 100-110 days subject to weather conditions and with eyes of scrutiny very much on the company in these difficult times,
The refinancing issue gets another mention, stressing again that all shareholder and lender approvals have been received with the agreement expected to become effective from 28th July. Undoubtedly Premier Oil’s share price has been impacted by the shorting of shares associated with the refinancing deal with shorts reaching around 30% according to Euroclear. It remains to see whether shorts will start to close on refinancing completion.
The report states net debt has reduced by $30m during the period, from $2.77 billion to $2.74 billion. Shareholders will have been hoping for more but premier highlights ‘positive free cash flows for the period being offset by translation differences on non-dollar denominated debt’. This reasoning does seem unusual given that the US Dollar has weakened over this period.
Whilst I remain positive on Premier Oil, I wish to disclose that I took the decision to derisk ahead of the trading update. I took some profit on Wednesday after having increased my holdings significantly whilst the share price was in the 40s and 50s. Assuming the refinancing is now a mere tick-box exercise, Premier Oil has a good chance of reducing debt if oil plays ball. Oil remains extremely volatile, however, the USA summer driving season is here, traditionally a time for weekly inventory draws, and oil shorts are appearing to peak once again which is usually a good indicator of a possible turnaround.
The oil price required for Premier Oil to breakeven is currently stated as $50, and a hedge on 25% of production at $52 will help prop up this years average price. Keep in mind once Catcher oil flows, this breakeven figure is expected to significantly reduce, facilitating a quicker reduction in debt and giving Premier Oil much more headroom in the event Oil prices are still challenging.
If you are bullish on future oil prices and looking for stocks with potential, Premier Oil appears to be making the right noises to consider for a recovery play.
The author of this piece owns shares in Premier Oil.