Premier Oil (LSE:PMO) released a trading and operations update yesterday revealing it’s on target to meet yearly production guidance of around 80 kboepd. It’s current workhorse, the Catcher field, has been exceeding expectations, with production rates of over 70koepd. Premier is now looking to increase the asset’s contractual oil production rate from its current 60 kboepd to 66 kboepd. It’s worth noting that the current production is running higher at 85-90 kboepd, not only driven by Catcher but also with outperformance from the Chim Sáo field which is contributing 15.6kboped.
The key factor holding Premier back continues to be its sizeable debt which, despite reducing by $200m so far this year, still stands at a chunky $2.52bn as of 31st October 2018. The company forecasts this will fall further to $2.4bn by the year end. Operating costs remain unchanged for 2018 at $17-$18/boe with capital expenditure on forecast exploration and abandonment slightly lower than guidance at $365 million. Premier clearly has a handle on the debt now but with the 2016 oil rout still fresh in the minds of investors, those pounds could do with dropping off a bit quicker to ease concerns further.
Probably as a result of this financial burden, Premier has found itself particularly sensitive to oil price movements – having had an impressive rally to 146p while brent crude headed to $80+, only to fall hard with the extreme pullback the sector has experienced over the past couple of months. Premier is clearly not alone in this respect and It probably did not help matters that the share price had hit such an area of strong resistance on the chart too (see below).
From a technical analysis perspective, both short and longer-term price channel tops were hit as well as a horizontal resistance found just under 150p. Also, a major diagonal resistance line (green) formed from the previous peaks in 2010 and 2014 added to the uphill struggle facing the stock. Of course, Premier will fight another day as far as the charts are concerned and it will need to break past this key long-term diagonal in order to make a fresh assault on those recent highs. This kind of move in itself would be very bullish for the share price.
Provided oil prices stabilise – or even better recover some of their recent loses – and the company’s debt continues to drop, Premier could be targeting 150-180p next time around. Throw in the potential build in excitement around the appraisal of Zama and Premier’s stock price becomes increasingly attractive on a risk/reward basis at 86p today. Premier’s gas project, Tolmount is also progressing well with platform construction starting in December and the Tolmount East appraisal well is scheduled to spud mid-2019. Natural gas prices have been on an explosive run recently which can only be positive for the project.
Tony Durrant, Chief Executive, commented:
“Premier is now generating significant free cash flow. Our portfolio is currently producing 85-90 kboepd, our low-cost base has been maintained and our capital spend is tightly controlled. We are on track to deliver material debt reduction in 2018 through 2019, substantially improving our balance sheet. We look forward to the appraisal of our world class Zama discovery, starting later this month, and the commencement of construction activities for our high value Tolmount gas project in December.”