Premier Oil (LSE:PMO) released a trading and operations update on Thursday ahead of its 2018 full year results expected on 7th March 2019. The company pleased investors with the announcement that estimated year-end net debt has fallen to $2.3 billion, below previous guidance of $2.4 billion. The $390 million reduction in net debt during 2018 was achieved alongside free cash flow generation of $250 million. Of this, $75 million is attributable to disposals. The conversion of the convertible bond provided an additional $180 million to the company.
Premier estimates that it generated revenues of $1.4 billion in 2018, up from $1.1 billion in 2017, as a result of increased production and stronger commodity prices.
Meanwhile, full year production in 2018 was up 7% compared with the previous year at 80.5 kboepd and output in November and December averaged 92 koepd, exceeding forecasts. 2018 was a new record year for production, and the growth was achieved in spite of asset disposals. The progress mainly came down to new production from the Premier-operated Catcher Area, which is producing at an increased oil rate of 66 kbopd. The business was also boosted by strong performance across its Asian assets.
Production is expected to average around 75 kboepd in 2019. Premier says cash margins will also improve at comparable commodity prices because higher margin UK oil production will make up a greater proportion of its output. The ramp up of Catcher, partially offset by the sale of Wytch Farm, resulted in an 18% increase in UK production. Premier has been very prudent, hedging 36% of its forecast oil production for 2019 at $70 a barrel. In total, around 30% of 2019 forecast oil and gas production has been forward sold at prices significantly above current pricing.
Premier also revealed below guidance capital and operating expenditure. The company estimates total capex of $355 million in 2018, and opex is estimated at $16.9/boe.
The company says it is well placed to deliver further debt reduction in 2019. The current weaker sterling exchange rate and strong UK gas prices are offsetting the recent oil price drop. On a full year basis, Premier expects to generate positive free cash flow at oil prices above US$45/bbl in 2019.
Premier is busy on a number of fronts in the first half of the year. Following the excitement of the huge Zama discovery off the coast of Mexico in 2017, an appraisal is underway. The results of its first appraisal well (Zama-2) are expected shortly. Premier holds a 25% interest in the block, where a very substantial oil bearing interval – which indicates over 1 billion barrels of oil in place – was discovered. Block 30, which Premier and its joint venture partners DEA and Sapura Energy were awarded in March 2018, is located directly to the south-west of the Zama discovery. 3D seismic will be acquired in H1 2019 ahead of firming up drilling locations for 2020.
Premier is also busy at the Tolmount gas project, where platform construction is underway. The Tolmount East appraisal well is scheduled to spud mid-2019, and 3D seismic across the Greater Tolmount Area is also planned for H1 2019.
Tony Durrant, Chief Executive, commented:
“Our strong operational performance and disciplined expenditure have enabled us to reduce our debt levels ahead of forecast. At the same time, we have continued to build our portfolio for the future, sanctioning our high-value Tolmount Main gas project and capturing highly prospective new acreage in Mexico and Indonesia. Looking to the year ahead, we have a strong production base which is well hedged, and our priority remains to further reduce our debt levels while progressing our future growth projects to final investment decisions.”
As you would expect Premier’s share price is tied closely to the oil price and suffered a sharp pullback as Brent dropped from a high of $86 in October 2018 to a low of $50 just three months later. Premier peaked at 147p in sync with Brent highs, but the stock was facing strong resistance at this level regardless from a technical charting perspective. The price action was right at the top of the stock’s trend channel that dates back to the lows of 2016. This also coincided with a much longer-term resistance trend line formed from the highs of 2011, 2014 (green line). It’s rare for a stock to run through such multi-resistance with ease on a first attempt and the subsequent oil price retracement put a stop to a further attempt. The odds of success for the next attempt – all things being equal – are surely much better with the threshold to break through long term resistance now at 130p and dropping. Also around this level is a substantial gap in price action between 129-132p. Although inexplicable, it is generally the case that price gaps eventually get revisited and ‘filled’ on stock charts.
At present, the stock is tackling resistance at 78-80p, which coincides with its 50 Day Moving Average (DMA). On Thursday, Premier closed just above its 50 DMA, and the next key resistance level is around 100p. Some minor resistance can be found at 86p, but the Relative Strength Index (RSI) is now a shade under 60. Typically, prices can make their biggest moves when the RSI is in the warm 60-70 zone.
Ultimately, Premier’s ability to pay down debt is the likely key factor affecting its share price. It seems fair to assume further oil price rises will be the main trigger for a continued recovery of the stock. Add in potentially positive news from the Zama-2 appraisal well, and Premier looks destined to be comfortably over £1 once again.