US Edition Premier Oil
297.2p-3.6
Questor says HOLD
PREMIER Oil yesterday announced it was walking away from exploration licences in Kenya. The setback represents only a small part of the company’s larger exploration portfolio, but caps off a miserable year for the FTSE 250-listed oil exploration and production group.
An exploration review of block10A in Kenya’s offshore oilfields has resulted in the withdrawal from licences. Analysts from UBS estimate that a discovery here would have added between 1p to 12p per share, so the loss is not a disaster. However, with the shares having fallen 16pc in the year to date, the UBS analysts quite rightly pose the question: are the shares too cheap, or is Premier a value trap?
It has been a difficult year for Premier. Production delays in the North Sea have weighed heavily on the share price.
The Huntingdon field, of which Premier has a 40pc share, was expected to produce gas at the end of last year, with full production reaching 30,000 barrels per day (bpd). Repeated technical issues meant production had reached only a third of the expected total three months ago, and about two-thirds of full production by the end of November. Premier had to reduce full-year group production guidance by 14pc, from about 67,500bpd down to 58,000bpd.
In terms of cash, the loss of production from Chim Sao, in Vietnam, and Huntingdon is thought to have cost in the region of $250m (£153m) from operating cash flow. Demands on cash are increasing into next year as Premier is expected to increase capital expenditure by about $100m to $1.3bn.
The shares remain cheap compared with peers, however. Premier is now trading on 6.9 times forecast earnings, compared with EnQuest on 8.9 times. That is because Premier’s oil reserves are in parts of the world that are costly to reach and difficult to extract from.
Analysts estimate that the Sea Lion field off the coast of the Falkland Islands contributes to about 20pc of the group’s net asset value, or 60p per share. The production difficulties in the North Sea highlight the risks the company will face in the more hostile seas in the southern Atlantic. There is a long wait too, as the Sea Lion project is not expected to produce oil for another three years.
The other big question around all the explorers is the price of oil. The price of Brent crude has fluctuated between $86 per barrel to $105 per barrel over the past 12 months. However, analysts have recently downgraded the outlook for the price to about $92 per barrel; as a rough measure, each $10 oil price fall equates to a 15pc reduction in the net asset value, or 45p, from the current share price.
Premier’s problems have certainly not been in discovery. It has been an excellent year, with six discoveries out of seven prospects, including the Luno II field off Norway that is thought to be worth $144m, or up to 17p per share. The issue has been around getting discoveries to produce in a reliable fashion. While the outlook has improved in that respect, the risks remain, and the weaker oil price outlook is also a worry. Questor recommended buying Premier Oil at 346.5p on August 23, as we highlighted a return to production could boost shares.
But instead of the hoped-for gush in production, it only spluttered back into life, and the shares are now down 13pc from when we said “buy”. Premier remains a good long-term opportunity, but the risks have increased going into next year, so we downgrade to a hold.