These are not comfortable times for Premier Oil (LSE: PMO) shareholders. And with an oil price slump in full swing, looking at the Premier Oil share price chart isn’t for those of a nervous disposition.
The shares had only just been getting some life back after the previous downturn, reaching as high as 120p at the start of the year. Premier’s debt had come close to crippling the company back when the price of oil had fallen to $30. But with oil up in the $60-$70 range, things were looking better.
At the end of December, Premier had got its net debt down to $1.99bn. That’s still scarily high, but a lot better than the $2.33bn a year previously. The firm’s covenant leverage was still concerning at 2.3x but, again, significantly better than 2018’s figure of 3.1x.
Free cash flow came in at $327m, and the share price was starting to look sustainably healthy again.
Oil price crisis
But then Covid-19 arrived. We had lockdown, the FTSE 100 crashed, oil demand plummeted and the Premier Oil price slumped once more.
A barrel of Brent crude is fetching around $20, as I write, and the Premier Oil share price is down to just 21p. And we’re back asking the same questions we were during the last oil price shock. When will oil recover? What level will it reach? And, crucially, can Premier Oil survive until it happens?
This time round, yes, I’m sure the oil crisis will end and prices will recover. How high? It’s only a guess, but I can see oil getting back to long-term prices of between $50 and $75 again. At those levels, Premier will be able to generate profits and strong cash flow. And get back to paying down that debt.
Multibagger recovery?
So when the oil crunch does end, I can see the Premier Oil share price recovering again. From today’s low levels, I really can see the chance of a multibagger here.
But that can only happen if Premier can survive long enough in the meantime. As my fellow Motley Fool writer Rupert Hargreaves has pointed out, Premier has cash of $135m and undrawn debt facilities of $330m. The firm is planning to reduce capital spending by $100m per year too, which will also help.
And having hedged 30% of its anticipated 2020 oil and gas production, as Rupert says, it looks like Premier can hold out for a while at $20-$30 oil price levels. The big question is how long?
Premier Oil share price
If debt facilities are drawn down much further and net debt starts to pile up again, I can see investors being more reluctant to pile back again this time round. And I can see the Premier Oil share price languishing at its current lowly depths for longer.
Even when we’re out of the current oil crisis, Premier will still face the longer-term risks of running a business with very high debt levels. And it could be back at square one in trying to get down a newly-inflated debt pile once again.
I do think there’s a decent possibility of a big profit here. But I also see a chance of a wipeout.