Even by the typically dull standards of pre-close trading updates, the one Premier Oil (LSE: PMO) released on Thursday didn’t make for the most riveting read. But for a company that many investors feared was dead in the water just a few months ago due to a staggeringly high pile of debt, it was quite reassuring all the same.
Reason number one is that Premier said it’s close to a final agreement with lenders over refinancing the $2.8bn of debt on its books. This was becoming a major problem as falling EBITDA would have led the company to breach debt covenants had lenders not agreed to postpone covenant tests until December 2017.
Premier still has yet to fully announce the terms of this proposed agreement with creditors but warned that it would include some equity warrants, which will lead to dilution for current shareholders should bondholders exercise their option. The good news is that there won’t be a full rights issue as cash isn’t an immediate problem for Premier with $600m of cash and undrawn credit facilities on hand.
On the ground things are certainly looking up as 2016 saw average daily production rise 24% to 71.4k barrels. Management guided for a further increase in 2017 to at least 75k barrels per day excluding the impact of the $1.6bn Catcher field, which is due to post first oil this year. As production rises and relatively low-cost operations are cash break-even at around $25/bbl, Premier’s cash flow statement should be improving this year.
With capex falling significantly as major projects come online and low operating costs, Premier shares could be in line for some upward re-rating should oil prices rise from their current $53/bbl price and a favourable agreement with bondholders be struck. But these are big ‘ifs’ and with shares trading at 21 times forward earnings, Premier is no bargain basement buy unless you expect oil prices to skyrocket.
More of the same?
Fellow oil midmajor Tullow (LSE: TLW) also released a solid, if not spectacular, trading update a day prior to Premier. Tullow is similar to Premier in many ways, including the fact that it’s swimming in debt, $4.8bn in net debt in this case, and is seeing capex plummet as new assets come online.
In Tullow’s case daily production from West African assets rose to 65k barrels in 2016 and is forecast to jump to between 78k and 85k in 2017. With core Ghanain assets operating costs only $9/bbl Tullow managed to be free cash flow positive in Q4 of 2016. And as production ramps up and operating costs come down, management is confident it will continue to generate positive cash flow with oil at around $50/bbl.
Further good news is that a full 60% of 2017’s expected production is hedged at a floor of $60/bbl, providing a significant cushion should oil prices not continue their recent rally. Unfortunately, oil prices certainly seem range bound in the $50-$55/bbl bracket and with Tullow shares trading at 19 times forecast 2017 earnings there’s already significant growth baked into share prices. Tullow is still a solid company but unless oil prices rise precipitously I don’t see shares skyrocketing anytime soon.