When Premier Oil (LSE: PMO) released its half-year results for 2014 it reported net debt of $1.7bn (£1bn at the prevailing exchange rate), while its shares were trading at 335p, giving it a market cap of £1.8bn. With the price of oil above $100 a barrel and the company generating healthy profits, the debt didn’t appear unduly high.
Then came the great collapse in the oil price. Profits turned to losses. By the end of 2015, oil was heading towards $30 a barrel. Premier’s shares were heading towards 30p and its market cap to not much more than £150m. Meanwhile, net debt had risen to $2.2bn (£1.5bn at the prevailing exchange rate).
Within the space of 18 months, debt had become a huge problem, being 10 times the company’s market cap. Having reached agreement with its lending group during 2015 to modify its financial covenants, it had to seek further amendments in 2016. Finally, after protracted negotiations with its lenders, it agreed a refinancing deal.
New era
Today, Premier is on a more stable footing. And with the cost-cutting initiatives of the last two years, new production coming on tap and a partial recovery of the oil price (currently $49 a barrel), investors can look forward to a new era.
City analysts are forecasting a small profit this year, followed by a significant advance in 2018, with a consensus for earnings per share (EPS) of $0.30 (23p at current exchange rates). At a share price of 50p, the price-to-earnings (P/E) ratio is just 2.2. This suggests there is considerable upside potential for Premier’s shares and they look eminently buyable to me at their current level.
Footsie giant
BP (LSE: BP) endured a less perilous journey through the oil crisis than Premier, its shares falling 37% peak-to-trough, compared with the decline of over 90% suffered by Premier’s shareholders. Furthermore, at a current 445p, the FTSE 100 giant’s shares are only 14% below their pre-crisis level, while Premier’s are still some 85% down.
Despite BP’s relatively strong share performance, the valuation continues to look reasonably attractive to my eye. The City consensus for this year is EPS of $0.34 (26.2p at current exchange rates), followed by $0.41 (31.5p) next year on the back of earnings growth of over 20%. This gives P/Es of 17 and 14.1 respectively. Furthermore, the price-to-earnings growth (PEG) ratio is an eye-catching 0.7. This is firmly on the value side of the fair-value PEG marker of one and suggests there’s scope for BP’s shares to climb higher.
BP also offers an attraction that Premier currently doesn’t. Namely, a dividend — and a mighty juicy one at that. The City expects the company to maintain the payout at last year’s $0.40 level (30.8p at current exchange rates), which gives a prospective yield of 6.9%.
Oil price
Of course, the fortunes of both BP and Premier are intimately linked to the price of oil. A major reversal in its recovery wouldn’t be welcome and could certainly put BP’s dividend at risk. However, most oil analysts aren’t forecasting this in the near future, albeit neither are they forecasting a rapid rise. We may not see $100 a barrel again for many years, but Premier and BP don’t need oil at such an elevated level to deliver for their shareholders.