I bought shares in Premier Oil (LSE: PMO) in late 2015 with oil about $50 per barrel. I was expecting it to pick up and was thinking around $75 would be a reasonable long-term expectation, and that Premier’s opportunities would outweigh its debts at that level.
The price went on to plunge to lows of less than $30, and Premier Oil shares slid even lower. We’re now finally back at $73, which has taken a fair bit longer than I expected. And with the shares back up to around 94p, I’m now only 5p per share down on my investment!
Premier announced asset disposals Monday, which will hopefully provide a little boost to confidence in its ability to slowly chip away at that debt mountain.
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At 31 December 2017, net debt came to $2,724m, down marginally from $2,765m a year previously. But cash resources had grown from $256m to $365m, the company’s refinancing was complete, and all of its facilities had been extended to at least May 2021.
Further cash is to be raised from the sale of Premier’s interests in the Babbage area to Verus Petroleum, including a 47% interest in the Babbage gas field and a 50% interest in the Cobra discovery. The deal will generate a net £45.9m for Premier, which could be boosted by up to £5.5m more should the Cobra discovery be developed.
Chief executive Tony Durrant said the sale “will immediately reduce our net debt and our committed exploration spend in 2019,” adding that it “further demonstrates our determination to restore our balance sheet strength.“
It is a relatively small sum, and the debt reduction is going at a glacial pace. But against that, the rising value of the firm’s assets as oil continues to appreciate makes me think Premier’s darkest days are over.
More debt
It’s impossible to speak of debt-laden oil companies, without also thinking of Tullow Oil (LSE: TLW). This is another whose share price is starting to pick up now the value of the black stuff is higher, although like Premier, we’ve had a few false starts as oil markets have been up and down a bit.
But the Tullow share price is another that I think could be in for a sustainable recovery if today’s moderate oil price bullishness is finally here to stay.
At $3,471m at the end of 2017, and after refinancing, Tullow’s net debt figure is significantly higher than Premier’s. But with its market cap of more than £3bn coming in more than four times Premier’s, proportionally it’s lower. And it’s coming down a lot faster as Tullow’s serious efforts to cut costs are bearing fruit.
At the and of 2016, net debt stood at a more frightening $4,782m. Now it’s down to a net debt-to-adjusted EBITDAX (EBITDA plus exploration costs) gearing ratio of 2.6 times, and the company is targeting a value of 2.5 times or less.
Tullow is expecting production in 2018 to come in pretty flat after the firm reported its first operating profit in three years in 2017. And it’s already looking like its average per-barrel sale price will be significantly higher this year.
A note of caution though, as there are political issues built into the current oil price — Syria, Iran, fears of sanctions and production disruption. But again, I reckon we’re well past the worst here.
