Premier Oil (LSE:PMO) has seen its share price crash over 32% in the past week. Is this a short-term blip or a warning sign of things to come? From £1.20 a share in January, the PMO share price collapsed to 12p during the March market crash. It gradually rose above 50p in June, but subsequently retreated. So, is there a chance it could surge back over 50p? With a stock this volatile, it is always a possibility, but unfortunately it has a lot stacked against it.
Its recent earnings were disappointing. Production fell from 84,000 boepd to 67,000 boepd year-on-year. It agreed an emergency US$2.9bn refinancing deal and plans a new equity funding round, to allow it to purchase BP assets and pay down debt.
Power lies in the price of oil
The price of oil is the driving force behind the success or failure of companies like Premier Oil. It can make or break them and unfortunately, this year it has reached breaking point for many.
Oil companies (both the majors and the independents) require vast sums of money to operate and their survival depends on oil being at a certain price point. For BP, its break-even point is around $35 per barrel, while PMO needs an oil price of closer to $50 a barrel. That’s just the price to survive. To be economically viable, pay down debt and make a profit, the price of oil needs to be higher still.
Personally, I am bullish on oil for the long term. I think the world remains highly dependent on it and I don’t see it disappearing completely. From that point of view, I think it will eventually rise to a much higher price point, but I don’t see that happening soon. Whether it rises quickly enough for the PMO share price to recover remains an open question.
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Supply vs demand
The price of oil remains suppressed as long as supply outstrips demand. Demand is low because the pandemic has restricted travel and other businesses. However, there is a supply glut because many millions of barrels of oil stand in storage with nowhere to go.
Although the OPEC+ alliance agreed to big output cuts, there are countries outside of the alliance that have carried on producing, such as the US.
Most US shale rigs cannot afford to run at $40 a barrel so they are being shut. But as soon as the price reaches $50, they can immediately start producing again. This makes the balancing act very fine and the likelihood of a sustained run of $50+ oil harder to achieve.
Will the PMO share price surge?
The oil price is also susceptible to geopolitical headwinds, such as the US-China trade war. But Donald Trump appears to want to get China-US relations back on a tentatively even keel in the run-up to the November election, which may provide a welcome boost to the price of oil.
During a downturn, with so many independent oil companies filing for bankruptcy, the Premier Oil share price is a speculative buy. It does not offer a dividend and is facing a very uncertain future. Its price-to-earnings ratio has fallen to 1.5, against an industry average of 17, and earnings per share are 15p. Unfortunately, I do not see the PMO share price surging above 50p soon.
