LONDON, March 5, 2020 /PRNewswire/ -- Further to ARCM's statement on 24 January (available here), in which we questioned Premier Oil's forecasted free cash flow ("FCF") for the proposed acquisitions, ARCM has carried out a more detailed review of the Company's public disclosure around these transactions. Our analysis, which is based on the Company's publicly disclosed data (for detailed assumptions see the notes section), shows that cash flows at the 31 December 2019 Brent and UK gas forward curves would be less than $400 million from the potential transaction closing date until the end of 2023 – compared to the ">US$1 billion" statement made by the Company in its presentation on 7 January (which did not provide any details regarding the working capital adjustments between 1 January 2019 and the closing date).
This <$400 million figure needs to be considered in the context of the Company taking on an incremental $600 million of pre-tax decommissioning liabilities, significantly increasing its exposure to the challenging UK gas market and assuming aging assets from BP.
It is also important to note that the cumulative cash flow figure shown below would in fact be substantially lower than what is shown in this analysis at the currently prevailing forward curves for Brent and UK gas.
As we have previously highlighted, this transaction was negotiated by the Company last autumn, prior to the significant sell-off in the UK gas forward curve due to worsening supply/demand fundamentals, and in our statement on 24 January we encouraged the Company to provide updated FCF guidance which better reflected this dynamic. The model below, which forms the basis of our analysis, is based on Premier Oil's public disclosures and uses forward prices for Brent and UK gas as of 31 December 2019 (predating the market reaction to the Coronavirus).
Premier Oil Cash Flow Projections from the closing of the acquisitions (see notes overleaf)
Production Profiles (kboe/d): Based on estimates from the Company's presentation on 7 January 2020 (available here)
Total Production (mmboe): For each asset the annual liquids and gas production is derived by multiplying the daily production profiles (kboe/d) by 0.365. For 2H 2020, the production profile (kboe/d) is multiplied by 0.183 since the calculation utilizes half year cash flows from 2H 2020 onwards.
Combined Production (P): Sum of the total liquids and gas production in mmboe across Andrew, Shearwater and Tolmount
Combined Opex (OP): As per Page 4 of the Company's presentation on 7 January which states "Adds low cost assets with combined opex of < US$20/boe (2019 to 2025)". Combined opex has been assumed to be $19/boe
Oil and Gas Price Assumption: Forward curves from Bloomberg as at 31 December 2019
Condensate Differential vs Brent (D): Taken as the average $/bbl differential of naphtha over Brent since 2019.
Implied Condensate Price (C): Oil price assumption plus the condensate differential. This is used for calculating Shearwater liquids revenues since Shearwater liquids are condensates as stated on page 8 of the Company's presentation on 7 January
FX Rate (FX): Assumption of 1.3 USD/GBP
Gas Price in $/boe (G): Derived by multiplying the gas price in p/therm (UKG) by the FX rate assumption (FX) and the therm to boe conversion factor of 0.58 (CF)
Total Liquids Revenue (TLR): Sum of liquids revenue across Andrew, Shearwater and Tolmount as detailed below
- Andrew: Derived by multiplying the Andrew liquids production in mmboe (AL) with the oil price in $/bbl (O)
- Shearwater: Derived by multiplying the Shearwater liquids production in mmboe (SL) with Implied condensate price $/bbl (C). This is because Shearwater liquids production is assumed to be entirely condensate.
- Tolmount: Derived by multiplying the Tolmount liquids production in mmboe (TL) with the oil price in $/bbl (O). This is zero since Tolmount doesn't produce any liquids
Total Gas Revenue (TGR): Sum of gas revenue across Andrew, Shearwater and Tolmount as detailed below
- Andrew: Derived by multiplying the Andrew gas production in mmboe (AG) with the gas price in $/boe (G)
- Shearwater: Derived by multiplying the Shearwater gas production in mmboe (SG) with the gas price in $/boe (G)
- Tolmount: Derived by multiplying the Tolmount gas production in mmboe (TG) with the gas price in $/boe (G)
Total Revenue: Sum of Total Liquids Revenue and Total Gas Revenue
Opex: Derived by Multiplying Combined Production in mmboe (P) with Combined Opex in $/boe (OP)
EBITDA: Total Revenue less Total Opex
CapEx: As detailed below
- Andrew LC: Page 7 of the Company's presentation on 7 January states "Estimated total capex of up to c. US$120m (net to Premier)". This is assumed to be spent over 2021, 2022 and 2023
- Tolmount: Page 9 of the Company's presentation on 7 January states "pro forma 2020 Tolmount capex expected to be c. US$100m (net to Premier)" which is assumed to mean $100m CapEx for the 75% stake. This would imply a CapEx of $33.3m for the 25% stake (100/75% *25%). Assumed to be spent equally in 2020, which implies a 2H 2020 CapEx of $16.7m
- Development CapEx: The UK Oil and Gas Authority's (OGA) document from March 2019 titled "Projections of UK Oil and Gas Production and Expenditure" (available here) implies an average CapEx of GBP6.4/boe from 2020 to 2023 which translates to $8.3/boe using the FX assumption given above. Development CapEx in each period is derived by multiplying Combined Production in mmboe (CP) with $8.3/boe
Cash Flow: EBITDA less total CapEx
Total Cash Flow (2H 2020 to 2023): Sum of Cash Flows from 2H 2020 to 2023
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SOURCE Asia Research Capital Management (ARCM)