Is it game over for the Premier Oil share price?

Roland Head explains why he thinks Premier Oil plc (LON:PMO) has been hit so hard by the falling price of oil.

| 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 painful few weeks for Premier Oil (LSE: PMO) shareholders. The oil and gas producer’s share price has fallen by more than 50% since the start of October, when it hit a 52-week high of 146p.

As a shareholder, I have a keen interest in this situation. So today I’m going to take a fresh look at Premier. I’ll explain why the share price fall has been so brutal, and ask whether the shares are still worth buying.

What’s really happened

You probably already know that the price of Brent Crude oil has fallen by around 30% since the start of October, from a high of $86.70 to about $60.

Should you invest £1,000 in M&G right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if M&G made the list?

See the 6 stocks

It’s no surprise that oil stocks have suffered. But you may wonder why Premier’s share price has fallen by over 50% when the price of oil has only dropped about 30%.

There’s a good reason for this. The cost of producing a barrel of oil is relatively constant over short periods. For our purposes, we can consider it to be a fixed cost. This means that if the price of oil rises, the extra sales revenue is almost all profit.

In a rising market, the firm’s profits from selling oil will rise more quickly than the price of oil. On the other hand, when the price of oil falls, Premier’s profits will fall more quickly than the oil price. This is an effect known as operating leverage.

Although I’ve simplified it considerably, I estimate that a 10% increase in the price of oil could increase Premier’s profits by as much as 14%. I hope this makes it easy to understand why oil shares can move so sharply when the price of oil changes.

Still making good progress

A recent trading update made it clear that Premier is still making good progress. Production is up, spending is down, and operating expenses are under control, at $17-$18 per barrel.

The firm has also put in place new hedging contracts for 2019, covering over 30% of planned production. They guarantee a minimum oil price of $69 per barrel during the first half of the year, and of $72 per barrel during the second half.

Chief executive Tony Durrant expects net debt to fall by $320m to $2.4bn this year, which he says will reduce the group’s net debt-to-EBITDA ratio to 3x. Although this is still high, Mr Durrant expects this ratio to fall further in 2019. I believe this could open the door to a more normal valuation for the firm.

Too cheap to ignore?

Broker forecasts for 2018 and 2019 have actually risen over the last three months, despite October’s oil price slump. Analysts appear to remain confident that the company can return to profit and continue repaying its debts.

If that view is correct, the stock’s 2018 forecast price/earnings ratio of 4.6 may be too cheap. A forecast P/E of 2.7 for 2019 also seems to be pricing in a lot of bad news. I continue to rate the shares as a buy.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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 owns shares of Premier Oil. 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

£10,000 invested in Lloyds shares on 7 April is already worth…

After a dip in early April, Lloyds shares are back to their 30%+ year-to-date gain in 2025. And analysts are…

Read more »

US Stock

What I’d look to buy as the US stock market heads for the worst month since 1932

Jon Smith sifts through the US stock market to try and find some ideas that have fallen in value recently…

Read more »

Growth Shares

Prediction: I think £1,000 invested in this UK stock could double by 2030

Jon Smith runs through a FTSE 250 stock with a market cap just over £1bn that he feels has the…

Read more »

Investing Articles

With £10k in savings, here’s how an investor could target a second income of £500 a month

£10k in savings could be the foundation needed towards a powerful second income. Our writer details some steps necessary to…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

£1k invested in the FTSE 100 on ‘Liberation Day’ is now worth…

Jon Smith talks about the volatility in the FTSE 100 in the weeks since the tariff announcements and flags up…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Barclays’ share price is down 7% from March, so is now the right time for me to buy?

Barclays’ share price has dipped recently, which could mean a bargain to be had. I took a deep dive into…

Read more »

Investing Articles

Down 13% since March, does this rising FTSE 250 defence star look an unmissable buy for me?

The FTSE 250 is currently home to many of the big stock stars of tomorrow and I think this high-tech…

Read more »

Investing Articles

Should I buy Aston Martin shares for my ISA while they’re under 70p?

With Aston Martin's shares down hugely across multiple time frames, this writer is wondering if he should snap up some…

Read more »