Is the Premier Oil share price now good value, after 50% fall?

Dice engraved with the words buy and sell
Dice engraved with the words buy and sell

2018 was a bad year for Premier Oil (LSE: PMO) shareholders. The £540m firm’s share price has fallen by more than 55% from an October high of 143p, to just 62p at the time of writing.

But while many of us were guzzling mince pies and turkey, takeover activity has been ramping up in the oil market.

In the run-up to Christmas, North Sea firm Faroe Petroleum (LSE: FPM) received an offer from Norwegian firm DNO. And when markets opened on 2 January, the Ophir Energy (LSE: OPHR) share price rose by nearly 35% when management confirmed that takeover talks are under way.

Today I want to take a look at the latest updates from Faroe and Ophir, and ask whether Premier Oil could be the next company to be targeted by a larger rival.

This offer seems too low to me

DNO’s attempt to buy Faroe Petroleum has triggered a war of words between the two firms. Faroe management said that DNO’s 152p per share bid is “opportunistic and substantially undervalues Faroe”.

In contrast, DNO thinks that “Faroe has failed to deliver consistent shareholder returns over the last 15 years” and suggested the firm could struggle to realise the full value of its assets.

In a statement on Wednesday, Faroe said that an independent valuation of its assets suggested a fair price of 185p to 225p per share. That’s 22% to 48% above the existing DNO offer.

My view: I think DNO’s offer of 152p probably is too low. But there’s no guarantee it will offer more and the offer could still fall through. I’d sit tight, but would not buy more Faroe shares.

Ophir surges 35% as talks confirmed

The share price of Asia- and Africa-focused oil and gas firm Ophir Energy flicked higher on New Year’s Eve. When the City returned to work on 2 January, the company issued a formal statement revealing that it’s in takeover talks with Indonesian firm Medco Energi.

I’ve written about the potential appeal of Ophir’s assets before. Today’s news has lifted the group’s share price by more than 30% to about 47p, but as yet there’s no guarantee that Medco will make an offer for the stock.

My view: I think Ophir shares could still be cheap enough to offer an opportunity, but there’s still a risk that no agreement will be reached. I’d hold.

A Premier buy?

One thing both Faroe and Ophir have in common is that they have low debt levels and plenty of cash. This isn’t true of Premier Oil, where net debt was expected to be $2.4bn at the end of 2018.

The company does have a plan in place to repay borrowings and also has the support of its lenders. However, last year’s oil price slump could slow the pace of debt reduction. And the firm’s high level of debt means that management needs the approval of lenders for any major investment decisions. This could restrict the company’s ability to grow.

My view: I think a potential bidder might decide that it could squeeze more profit out of Premier’s assets if the firm was freed from its debt burden. In my view, the current depressed share price could trigger an opportunistic bid.

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Roland Head owns shares of Premier Oil. 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.