The oil price crisis has had investors in heavily-indebted smaller oil companies nervously looking over their shoulders for a couple of years now — and as a Premier Oil (LSE: PMO) shareholder myself, my neck has been getting a bit stiff.
Slipping oil
The recovery in oil prices to above the $50 level gave Premier Oil shares a boost, but as the price of a barrel slipped back below $45, so the share price lost some of its gains.
Rumours that some of the company’s debt holders might be looking to offload their loan positions in the secondary market didn’t help. The firm was quick to deny it, telling us that debt refinancing talks are still making progress and that it had “significant cash and undrawn facilities of c.US$800 million at 30 June 2016“.
Today’s trading and operations update has given shareholders a little respite too, with the share price up 2.8% to 56p. Premier told us that it has a “comprehensive term sheet for refinancing in final stages of negotiation“, and that with current production of more than 80,000 boepd it is on track to meet it’s full year guidance of 68-73,000 boepd.
Full-year exploration and development capex should come in below previous guidance of $730m, with 2017’s figures expected to drop to around $300m. With the firm’s Catcher prospect expected to produce first oil in 2017 (at lower capex than anticipated), and with its Sea Lion fields looking very promising, there certainly seems to be a profitable future for Premier… if it can hold put against the pressure of that huge net debt of $2.8bn in the shorter term.
While it is concerning that these debt negotiations have gone on a lot longer than hoped, at the same time it’s encouraging that lenders are still sticking with it and not looking to trigger breaches of covenants. The shape of a final settlement is still unknown, but I’m optimistic about it.
Even bigger debt
Tullow Oil (LSE: TLW) shares have followed a similar trajectory, again held back by debt — a November trading update predicted year-end net debt of about $4.9bn, with spare debt capacity and free cash of around £900m.
Against that, Tullow has been hitting some important development and production targets, with its key TEN field offshore Ghana having produced first oil in August — with production up to around 50,000 boepd by the time of the latest update.
Chief executive Aidan Heavey pointed out that Tullow’s major capital commitments are at an end, and that “low cost West Africa oil production is increasing substantially“, adding that “As a result, we will start to generate free cash flow in this quarter and will begin the process of deleveraging our balance sheet“.
With debt refinancing on the cards, 2017 should hopefully be a turnaround year for Tullow in which we start to see material inroads made into the debt pile — a lot of Tullow’s debt isn’t due for repayment for a few years yet, and that’s a long time in the world of oil prices.
A lot of potential investors will still be scared off by the levels of debt facing both Premier and Tullow, and by the usual standards of leverage in the industry they’re certainly, erm, stretching. But I’m increasingly seeing signs of maximum pessimism, and for me that usually means it’s time to be optimistic.