Premier’s oil gushes in Mexico but it must cap debt
As one analyst put it, it would have been interesting to have been in the Pimlico offices of Premier Oil this week when news of the huge discovery at the Zama field off Mexico came in. This is a genuine game-changer, with 500 million barrels of oil recoverable in waters relatively easy to operate in and close to the necessary terminals and other infrastructure.
This makes scrabbling around in the North Sea for small discoveries seem less compelling, even if Premier is still drilling there. The company chose to put the news from Zama out a day before yesterday’s expected trading update and the shares rose 36 per cent — it has 25 per cent of the field and its Houston-based partner, Talos Energy, put out its own announcement at the same time.
Zama should break even with oil at $25 a barrel by the time it starts to produce in 2022 or thereafter. It takes a little pressure off Premier to go ahead with the Sea Lion field north of the Falklands, which in valuation terms is probably not that relevant even if the company is still talking about a firm decision on going ahead with this next year.
The financial restructuring of its debt is now over but there has been little progress in reducing this so far and it still stands at $2.7 billion. With oil at $50 a barrel, that will not move much this year. Once the huge Catcher North Sea field comes on stream in December that will change because the field should produce cash flow of $300 million to $400 million a year.
Meanwhile there is no more bad news from the accident-prone Solan field and Premier will be out of the Pakistan operation by the year end after a buyer was finally found in March. An exit from Mauritania would leave it focused on those productive assets in the Far East, the North Sea where the fields bought from Eon at the start of last year are performing ahead of expectations, the promise of Mexico and, potentially, Brazil and the Falklands.
The shares, off ¼p at 62¼p, were tipped by this column at the start of the year at 74p, shot ahead but have since been undermined by the fall in the oil price. The long-term story is there but given the slow pace of debt reduction the shares, after recent gains, may not have much further to run.
My advice Hold
Why While Zama is an unlooked-for boost, the low oil price will continue to hold back the pace of debt reduction until next year