Investors who were worried about one particular company’s net debt of $2.8bn would have missed out on an astonishing 380% rally over the last 12 months. Which firm am I talking about? The company in question is oil and gas producer Premier Oil (LSE: PMO).
Today, Premier announced details of its long-awaited debt refinancing plan. This should put it on a sustainable path to reduce debt levels over the next four years.
Good news for shareholders?
Premier’s share price has remained steady today. That’s partly because key elements of the deal had already been flagged up. We knew, for example, that shareholder dilution would be limited.
So does this mean that last year’s impressive recovery will continue? I’m not so sure. Premier’s high-quality assets and strong operational management have saved the firm. But the company borrowed too much and must still pay the price.
The main points of today’s deal are that it will have longer to repay its debts. The firm will also have to pay a higher interest rate — about 1.5% more in most cases. Lenders will be issued with warrants allowing them to buy up to 90m new shares at 42.75p per share. This equates to dilution of 7.6% at the current price, so isn’t too bad for shareholders.
The group’s lenders will also have to approve all capital expenditure for the next few years. In practice I expect this will mean Sea Lion in the Falklands won’t go ahead unless Premier can find a partner to take a significant stake.
Could have been worse, but…
Premier’s production is rising and cash flow should improve significantly when the Catcher field starts production later this year.
But as anyone with a mortgage will know, a 1.5% increase in interest rates is significant. In August last year, Premier said it was paying $5 per barrel in interest. That figure now seems likely to increase.
Improved cash flow later this year will be used to reduce debt levels, not fund new projects. My reading of today’s statement is that Premier’s lenders will extract as much cash as possible over the next five years, in return for their forbearance.
I expect growth opportunities to be limited and find it hard to see much value for shareholders at current levels. I’d invest elsewhere.
Loaded with cash and ready to expand
One company that has attracted my attention recently is Vietnam-focused SOCO International (LSE: SIA).
Soco had net cash of $100m at the end of 2016 and expects to receive a further $42.7m owed to it this year. The firm returned $18m to shareholders last year, giving a trailing yield of 2.8%.
Another attraction is that Soco has very low operating costs. Existing production reaches cash flow breakeven in the “low $20s” per barrel. However, production fell below expectations last year and it will eventually face decommissioning costs estimated at $61m.
This may be one reason why it’s gearing up for a new round of growth. The firm announced this week that former Cairn Energy executives Dr Mike Watts and Ms Jann Brown will head a new business development unit at the firm.
Soco is clearly planning something new and potentially significant. This isn’t without risk, but it could generate significant value for shareholders from current levels.