Premier Oil Must Focus on its Cash Flow and Balance Sheet and Abandon its Proposed Acquisitions

LONDON, March 12, 2020 /PRNewswire/ -- The fundamental changes in supply/demand conditions for both the UK gas and global oil markets has prompted several questions by the Company's stakeholders and the media regarding Premier Oil's proposed acquisitions, the likelihood of the Company being able to fund the transaction and management's rationale for digging their heels in. ARCM has previously highlighted its concerns relating to the proposed acquisitions and the recent developments only serve to amplify ARCM's objections to the proposed transactions.

Over the last few months, energy assets have de-rated significantly due to fundamental changes in the UK/European gas markets and global oil markets. Lower forward commodity prices will not only reduce the cash flow available to Premier Oil from the proposed acquisitions but, if sustained, would likely result in the acceleration of decommissioning liabilities. This would put further pressure on the Company's balance sheet and significantly increase the Company's risk profile.

These acquisitions were negotiated in the autumn of 2019 using forward prices of around $70/bbl for Brent and 50p/therm for UK gas[1]. We believed these estimates were unrealistic at the time and are even more unrealistic today.

As per Premier Oil's full-year guidance given on 5 March, it is currently projecting 2020 total production of 72.5 kbpd with approximately 51 kbpd of oil production. On the 2019 results conference call, the Company stated that the 2020 budget is based on $60/bbl. Based on this guidance and taking into account a capex increase to $470 million due to Huntington's earlier than planned decommissioning, Premier Oil was not projecting any meaningful cash flow generation this calendar year.

The current forward curve for the rest of 2020 is $42.7/bbl, $17.3/bbl lower than the Company's $60/bbl estimate. In its full-year presentation on 5 March, the Company stated that every $5/bbl change in the oil price results in a $60 million change in free cash flow. Based on the current forward curve, the Company's cash flow position would therefore be c. $200 million worse than what it projected in its recent full-year results presentation[2]. This compares to cash on balance sheet of $151 million at the end of December 2019[3].

As per ARCM's previous statements, we believe Premier Oil should be focusing on its cash flow position and protecting the balance sheet as a matter of priority. We encourage the Company to engage with its creditors to find a long-term solution which would significantly reduce leverage and provide a stable balance sheet, from which the Company could then prudently pursue growth opportunities. 

[1] The three CPR estimates for Andrew, Shearwater and Tolmount used average 2022 Brent price of $69.3/bbl and UK gas price of 49.7 p/therm

[2] The current Brent price of $36/bbl is $24/bbl lower than what the Company used in its budget. Based on daily production of 51 kbpd, that is equivalent to a $1.2 million difference per day relative to the Company's budget.

[3] Excluding cash of US$47.1 million held on behalf of joint venture partners or as security for letters of credit. Based on Company press release on 5 March 2020

Contact:
Greenbrook Communications
arcm@greenbrookpr.com
+44-207-952-2000

SOURCE Asia Research Capital Management (ARCM)