Are Premier Oil shares set to fly after the latest resource update?

This morning Premier Oil (LSE: PMO) announced news that all investors in an oil firm want to hear – expected oil resources at its Zama field in Mexico have increased significantly. Bring on the champagne. It shares must be jumping today, right? Well, apparently not. Though its share price did see some early gains, as I write this, the price is now back below yesterday’s close (albeit slightly).

In March this year, the company said it had finally moved back into profit after it benefited from a second year of record production. What happened to the shares? They are currently at about the same price as they were before the announcement (the price did move up for a week or so but soon came back down). Seemingly, the company can do no right.

Bad debt and bad timing

Now to be fair, all oil producers to one extent or another see their share prices move with the price of crude. In May, President Trump’s trade war with China began, hitting oil prices as the impact of potential tariffs and retaliations was digested. Since then however, crude prices have recovered, while Premier shares have fallen.

The main reason why investors are so cautious is the massive levels of debt that Premier holds – currently about $2.25bn. As it stands, even though this number is falling faster than anticipated, its liabilities are still far in excess of the market value of its shares.

In many ways, these debt figures were a product of bad luck for the company. Its massive liabilities came about after it invested heavily in its flagship project in the North Sea just before the oil price plummeted in 2014. When oil prices fall, oil producers don’t just make less money, but also have some of their assets move into unprofitable territory (certain projects need a minimum oil price to be cost-effective).

A brighter future

The company may be seeing a turnaround, however. In its latest financial update, Premier offered a very positive outlook. CEO Tony Durant said: “Production and free cash flow are ahead of forecast for 2019 and, consequently, we are reducing our debt faster than anticipated.” Investors’ main concern may become less urgent going forward.

FY18 pre-tax profit from continuing operations came in at $158.2m, compared to a $366.3m loss the previous year, while its Catcher North Sea project – the one that got it into high levels of debt to begin with – has started to pay off, helping to bolster average UK production by 47% year-on-year.

There are still some worries investors will need to overcome before fully backing the firm. For one, unlike most of its peers, the company doesn’t offer a dividend. Personally, I think this is a sensible choice given the need to reduce debt.

In January, rumours emerged that Premier would be tapping the equity market in order to fund a purchase of Chevron’s North Sea assets. The company reassured shareholders at the time that this wasn’t the case, but by its own admittance, it is still in the market for acquisitions that it thinks will add value.

Though I understand why today’s resource update didn’t exactly have investors flooding-in, I think a closer look at the company does offer some encouragement that its shares may be on the way up.