Why the Premier Oil share price is still my FTSE 250 oil pick

Oil pipes in an oil field

I admit that when I bought some Premier Oil(LSE: PMO) shares back in September 2015 at 99p apiece, I wasn’t expecting to be sitting here today nursing a 30% loss.

Then again, I wasn’t expecting depressed oil prices to last for so long, or to be looking at a price still as low as $60 per barrel today.

But timing has never been my strongest skill, and I remain convinced that I’ve made a decent long-term investment, even if the recovery is taking longer than I expected.

The low oil price has compounded Premier Oil’s big debt problem, which stems from the days of big borrowing when oil prices were a lot higher. But even at today’s modest $60 level, that debt is being chipped away.

Debt falling

Full-year results are due on 7 March, and on 10 January the company gave us an update. Net debt at the end of the year is now expected to be approximately $2.3bn, which is below Premier’s previous estimate of $2.4bn at this stage. And it’s steadily coming down from its peak of a little over $2.8bn in the third quarter of 2016.

It’s slow and painful progress, but it paints a far more positive picture than we were looking at during the depths of the crisis. Back then, Premier was struggling to refinance its debts, delaying its covenant tests, and looking like it might even go bust.

Prospects for reducing the debt at a faster rate in future are looking decidedly better too, I think, in the light of the company’s latest production figures.

Record production

Full-year production has come in at 80.5 thousand barrels of oil equivalent per day (kboepd), which is 7% ahead of the firm’s 2017 volumes — and it’s a new record for the company. Production actually peaked higher in November and December, averaging 92 kboepd, and that bodes well for 2019 output figures.

In addition, capital and operating expenditure are looking good. Total capital expenditure for the year has been put at $355m, which is below the previous estimate of $365m (and that was reduced from an earlier estimate too).

Operating expenses are below earlier expectations as well, and look set to come in at just $16.90 per barrel. With cost levels like that, even $60 oil looks pretty good — and I can still see the longer-term price at around $75.

New assets

All these figures are based on currently productive assets, and we mustn’t forget that Premier is putting a lot of work into the exploration side of its business.

At the time of the update, chief executive Tony Durrant said that “we have continued to build our portfolio for the future, sanctioning our high value Tolmount Main gas project and capturing highly prospective new acreage in Mexico and Indonesia.”

The latest on that score is that the Zama-2 well offshore Mexico has encountered 152 metres of net pay, with a 73% net-to-gross ratio that’s better than expected and higher than Zama-1. Reservoir quality is, apparently, similar to Zama-1.

Valuation

Putting this all together, I see the shares as attractively priced on P/E multiples of around 6.5 to 7.5, though I can see the share price remaining under pressure until earnings start to rise again. That’s predicted for 2020 after flat years in 2018 and 2019. I can wait.

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Alan Oscroft 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.

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