Absurdly cheap Premier Oil plc looks like an unmissable bargain stock

Premier Oil plc (LON: PMO) looks like it is over the worst but it still trades at a bargain price, says Harvey Jones.

| 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.

This is a good day for investors in Premier Oil (LSE: PMO), the independent British company with gas and oil interests in the UK, Asia, Africa and Mexico. Its share price is up 6.24% at time of writing, after reporting its full-year 2017 results this morning. The stock was cheap before today’s announcement, unmissably cheap in my opinion, but does it still look good value now?

Premier league

Premier’s oil production hit a record high in 2017, lifting total revenue from all operations to $1.1bn, against $983.4m in 2016, with a further boost from the recovery in the oil price. It posted a reported 15% rise in cash flows from operations to $496m, helped by its low cost base.

Chief executive Tony Durrant had plenty to feel good about: “2017 was a successful year for Premier with the refinancing completed, our producing portfolio performing well, the Catcher field brought on-stream and the notable Zama oil discovery in Mexico.”

Crude facts

He was also optimistic about the year ahead, saying: “2018 will see further production growth, allowing us to deliver on our plans for reducing net debt to restore balance sheet strength while also progressing projects that deliver the highest financial returns.” 

Premier’s comprehensive refinancing, which cast a shadow over the share price for some years, is now completed, leaving the company with year-end cash and undrawn facilities of $541.2m. The company also boasts a low cost base of just $16.40 a barrel, which is pretty handy with Brent crude trading around $64. Premier realised an average oil price for the year of $52.90 a barrel last year, up from $44.10 in 2016.

Catcher if you can

It also cut its debt development and exploration capex by 58% to $275.6m. Positive free cash flow stood at $71.2m while the group trimmed its net debt to $2.724bn. There is still a long way to go, as this marks a relatively small year-on-year reduction from $2.765bn. Premier reported a post-tax loss of $254.8m due to previously disclosed non-cash impairment charges and one-time refinancing fees.

Management also reported that Catcher generated its first oil in December, on schedule and under budget, while its “world-class” 600m barrel Zama discovery in offshore Mexico and $300m of non-core asset disposals gave investors something else to be happy about. Premier’s reserves now total 902m barrels, up from 835m in 2016. 

Forward look

I must admit I was sceptical about Premier’s prospects when I examined it in December, my major concern being its debt pile, which offset the attraction of its rock bottom valuation of just four times earnings. Today it is slightly more expensive, trading at 6.4 times earnings, yet ironically looks more of a bargain. Forecast earnings per share growth of 41% in 2019 supplies further encouragement.

My Foolish colleague GA Chester was more prescient than me, rating it a buy in February, and the outlook is certainly brighter. After four years of negative pre-tax earnings, City analysts are pencilling in $153.6m for 2018, followed by $195.27m for 2019.

These are of course only estimates and a lot could go wrong between now and then. Debt is still a concern, but right now it looks like a Premier oil play to me.

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.

Harvey Jones 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

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »