The Premier Oil share price is up 60% today! Here’s what I’d do now

The Premier Oil (PMO) share price is rising fast. Roland Head explains what’s happening.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a wild week for the Premier Oil (LSE: PMO) share price. Shares in the North Sea oiler have plunged from a high of 31p on Monday to close at 13p on Thursday.

As I write on Friday morning, the stock has now whipsawed back up 60% to trade at 20p. This move has followed an update from the firm which suggests it can survive the year with oil at $35.

What’s happening?

Saudi Arabia and Russia triggered an oil price crash on Monday when the pair failed to agree on new plans to cut oil production. In response, the Saudis announced that they would increase production by more than 20%, flooding the market with cheap crude.

With demand already weakening due to the coronavirus, oil prices crashed. The black stuff is now trading at $35, down from around $54 one month ago.

There’s an interesting backstory to this situation, but what we need to remember is that an oil price crash is seriously bad news for Premier. Seriously. Bad. News.

Why so worried?

Premier has two problems. Firstly, although it can ‘survive’ lower prives, it needs an oil price of nearly $50 per barrel to break even, on a cash flow basis. With oil prices under $40, the firm will be losing cash on each barrel it pumps.

For a well-funded company with cash in the bank and minimal debt, this would be sustainable for a while. But Premier isn’t that company.

The firm reported net debt of $1.99bn at the end of 2019. That’s a multiple of 2.3x EBITDAX (cash profits), which is above my comfort level of 2x.

Premier’s lenders may be uncomfortable too. Lower oil prices mean falling profits. I think it’s likely that the firm’s leverage could soon move beyond the limits agreed with its lenders. That could trigger refinancing and further losses for shareholders.

Why the Premier share price is rising

In today’s update, Premier says that it should be able to achieve neutral cash flow in 2020, even if oil stays at $35 per barrel. This will be achieved by cutting $100m from planned spending.

Alongside this, the company is still hoping to generate extra cash flow from planned acquisitions in the North Sea. But this deal may not go ahead.

An $871m deal in the North Sea

Premier is currently in dispute with its largest lender over plans to spend up to $871m acquiring additional North Sea oil fields.

Boss Tony Durrant says these acquisitions will boost the group’s cash generation and speed up debt repayments. But this deal will also require $300m of new debt, an extension of the group’s existing loans and a $500m equity fundraising.

There are a lot of moving parts here. I think it’s a fairly risky deal, although it might work out well if oil prices bounce back quickly.

Why I’d avoid PMO shares

In my view, anyone buying Premier Oil shares today is betting that the price of oil will recover quickly.

If oil doesn’t recover over the next few months, I don’t see much value in the firm’s shares. Indeed, I suspect the group could suffer a repeat of its previous debt problems.

In my view, there’s a real chance the Premier share price could go to zero pence. For that reason, I see this as a stock to avoid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »