When’s the best time to buy a profitable oil company like Premier Oil (LSE: PMO)? It might just be now.
The Premier share price, along with the sector, has been in a slump as oil prices have crashed — it’s down 55% over the past 12 months to 149p, and down 72% since the end of January 2011. A renewed downswing in oil prices, from $60 levels to only around $52 hasn’t helped, but I reckon we’re in one of the best time to pick up oil bargains that there’s been for some time.
As usual
The thing is, it’s just business as usual at Premier Oil. The firm recorded a loss last year, but there’s a modest profit on the cards for this year and the substantial growth forecast for 2016 would drop the P/E to 14, and at a time when earnings are at a low point, that’s looking good to me. The firm isn’t massively indebted like some in the business, and for the year to December 2014 we heard of very healthy operating cash flows.
On Thursday there was more good news. With its joint venture partners Talos Energy and Sierra Oil & Gas, Premier has been awarded two blocks in the Gulf of Mexico, described as “Tertiary clastic plays, typical of the Salinas sub-basin“, with the firm planning to “acquire, evaluate and reprocess 3D seismic data with a view to firming up drilling locations towards the end of 2016“.
Premier’s chief executive Tony Durrant said “We are very pleased with the outcome of this round which provides Premier with a low cost entry point to emerging plays in a proven oil and gas province“, and snapping up assets like this is exactly what oil explorers need to be doing in times like these.
This development builds upon Premier’s successes around the Falklands, with its most recent discovery at Isobel Deep at a higher pressure than expected providing high quality oil bearing sands.
No cash problems
And a trading update earlier this month looked strong, with an estimated 60,300 barrels per day expected for the first half of 2015, slightly down on 2014’s first half production of 64,900 — though with planned maintenance work and the running down of some fields, the full year should bring an average of 55,000 barrels per day. But the key point is that Premier’s production revenues were sufficient to keep its investment in exploration going, and net debt remained flat during the period.
Now, obviously I have no idea how long oil prices are going to remain so low — it’s not that long ago that BP boss Bob Dudley was talking about a cheap oil period lasting two or three years, and with China looking like it’s going through a longer slowdown than many expected, I suspect he could be right.
A future winner
But over the longer term demand will pick up and prices will surely rise, and it’s the companies that are profitable and doing well during these tough times that are going to come out of it ahead of the pack. And on that score, I think Premier Oil might even end up as home to some of my pension cash.