Why I might sell Premier Oil plc to buy Sirius Minerals plc

Sirius Minerals
Sirius Minerals

Sirius Minerals(LSE: SXX) is my best performing SIPP holding so far, and Premier Oil(LSE: PMO) is my worst -- a gain of 36% against a loss of 39%.

When I bought Premier Oil in September 2015 at 99p, I indulged in an attempt to time the market (naughty me). Oil prices must be on the brink of a recovery, and surely we'd see $70 per barrel within the next year to 18 months? Premier's debts were weighing heavily, but I reckoned the inevitable oil rebound would solve that.

But two years on from my purchase, oil is stuck at around $50. And at interim time in June this year, Premier was still saddled with $2.7bn in debt.

Time, not timing

Conversely, when I plumped for Sirius Minerals(LSE: SXX) at 18.2p in December 2016, I based my decision on the old adage that "it's time in the market that counts, not timing the market."

Production at the firm's polyhalite potash mine in North Yorkshire isn't expected to start until 2021, and we won't see any profits until some time after that. But the mine is expected to have a 100-year life with peak production of around 20m tonnes of polyhalite per year -- and it's the kind of thing that could provide a nice legacy to help my grandchildren (and even their children) with their lives' expenses.

And though I'm pleased that I'm already in profit at today's share price of 25.8p, it's actually pretty meaningless at this point. The Sirius share price has been spiking whenever news is released, and then falling back in the quiet periods in between. I've always said I expect that to continue until a lot closer to production time, and it does actually perhaps give us some leeway in trying to time the market -- as long as the dips persist, they do give us better buying opportunities.

Sirius is looking sufficiently well funded to reach its production date, and once the potash starts to flow it should be able to pay down debt levels pretty quickly if it achieves its expected cash margins of 70%-85%.

Should I switch?

There's an old saying that you should "run your winners and cut your losses", so should I dump Premier Oil and buy more Sirius Minerals with the proceeds?

I wish Premier Oil looked as safe as Sirius and that its long-term future was so visible, but at least its debt pile is actually reducing. At the halfway stage this year, chief executive Tony Durrant spoke of "excellent operational performance, which will drive free cash flow and the reduction of net debt", and the planned sale of Premier's Wytch Farm assets for $200m should chip away at it further.

And I do think Premier is past its point of maximum pessimism now.

The first half showed operational cash flow of $292m, up from $109m in the same period last year, and operational expenditure of $14.70 per barrel of oil equivalent is among the leanest in the business -- $50 a barrel is looking plenty for Premier to have a good future.

Expectations for a return to profit in 2018 could well be on the mark, and a forecast P/E of just 4.5 is too cheap to ignore. So, while my next chunk of retirement savings might well buy some more Sirius Minerals, I don't think I'll sell Premier Oil after all.

I'd like to retire wealthier than my parents, wouldn't you?

Investing in shares in companies with great long-term prospects can help you to the financial security you need for an early retirement. The Foolish Guide To Financial Independence looks at ways to reduce your outgoings while growing your cash, and gives you ideas for some great investments.

I strongly recommend you get a copy. It's completely free, and all you need to do is click here to have it sent to you right away.

Alan Oscroft owns shares of Premier Oil and Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.