A strange thing happened to Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW) on Thursday. Their share prices both moved upwards, and by more than 8%. They are up again today, another 4% or so at time of writing. This follows the 10% rise in the oil price on Thursday, the biggest one-day gain in six years, driven by falling US inventories, the global stock market rally and some contrarian bargain buying.
Both stocks are absolute contrarian plays, having fallen by more than 70% this year, sinking almost in lockstep in line with the oil price. Today’s rebound will come as some relief to embattled investors, but their future remains slippery.
Paint It Black
Premier Oil needs oil at $60 and beyond to ease its worries. In the first half of 2014, when it received an average $109 a barrel, it posted a profit of $50m. This year, at just $57 a barrel, that fell to a pre-tax loss of nearly $215m. Lengthy spells under $50 are going inflict a lot more damage. Making matters worse, Premier’s production is also down, slipping to 60,400 barrels of oil equivalent per day, against 64,900 last year.
Investors who feared that Premier would drill through all its debt facilities have received some cheer after it successfully stretched its debt covenants into 2017. There will now be no dividend for two years, but that won’t concern management or investors, who are now focusing on survival.
Premier will get some respite in the final quarter even if oil prices do remain low, when its Solan field should come on track. We must wait until 2017 for its Catcher field. Higher production can compensate for falling prices, but only up to a point, and that point is moving closer.
African Adventurers
Tullow Oil is on course to meet its full-year production targets, after sorting out a production dip at its Jubilee field in Ghana ahead of schedule. Thanks to hedging, Tullow achieved an average oil price of around $71 in the first half, but that was still down from $107 last year. It needs an oil price rebound just as much as Premier.
Tullow’s restructuring programme should save it around $500m over the next three years and offset some of lost revenues from cheaper oil and asset sales. There is also some promise on the production side, with its TEN Project on track for mid-2016, and West Africa oil production set to hit 100,000 bopd in 2017.
Its key investors have been edgy lately, and I don’t like the look of Tullow’s $3.6bn debt load. Some have been tempted by the company’s reputation as a takeover target, despite the chief executive’s claim that the Africa-focused company is too complex to buy. That sounds too speculative from me.
Premier and Tullow are all about the oil price. Macro fundamentals will determine their fate. Personally, I think China’s troubles have just begun, and oil will struggle to climb much higher at today’s supply levels. I’ll be exploring other opportunities.
