The last time I covered mid-cap oil producer Premier Oil (LSE: PMO), I claimed that the company would only be able to restore investor confidence in the group if it reduces leverage. Thanks to record production last year and higher oil prices, the firm has done just that.
In a trading update published ahead of its full-year 2018 results, the company revealed that it is expecting to report year-end net debt of $2.3bn, around $100m below management’s initial guidance of $2.4bn and a total reduction in net debt of $390m on 2017.
Reducing net debt by 16% year-on-year admittedly isn’t that impressive, but it is a step in the right direction. It will also help the company accelerate debt pay-down in 2019 as interest costs fall.
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Falling costs
According to my research, during the first half of 2018 the company paid $126m in interest on debt and some of the debt is costing firm as much as 7.1% per annum. The good news is, if we assume interest costs have fallen by a similar 16%, this means the enterprise has freed up another $40m per annum to reinvest back into debt reduction. These are only back-of-the-envelope figures — Premier’s cash flows are influenced by many different factors — but I think the number shows just how quickly the group’s fortunes will change now that it has started to get its finances under control.
Production hit a record 80,500 barrels of oil equivalent per day (kboepd) in 2018, rising to 92 kboepd in November and December, implying the company will have much more free cash flow in 2019 to continue deleveraging.
As Premier continues to shore up its finances, I think this is one company that’s worth keeping an eye on in 2019.
Big year
Another stock that I think could be set for big things in 2019 is Hurricane Energy (LSE: HUR).
If everything goes to plan, this company is planning to commence production from its flagship Lancaster prospect in the second half of the year. So far, everything is going right, and the construction of the early production system, designed to get the well in action as soon as possible, seems to be on track.
However, until production has actually started, I think the market will continue to view the business with a degree of scepticism.
Oil exploration and production is inherently risky, and there is still plenty that could go wrong over the next 12 months. A mistake when commissioning the early production system, for example, could set the business back months, or even worse, result in a catastrophic disaster that would cripple Hurricane. The company has undoubtedly done everything in its power to reduce the risk of a devastating accident, so I think in reality the chances of this are slim. Still, it is always worth considering the worst case scenario.
If the company does get its early production system in action on time, the stock could jump as the risks to the group’s outlook decline.
City analysts have pencilled in a possible net profit of $98m for 2019 if Hurricane can commence production on time, implying a forward P/E of 33.2.
