Last weekPremier Oil (LSE: PMO) fell over 30% on no news. Rumours were flying around of a rights issue and subsequent dilution this scared equity holders, and its shares were in freefall. Premier is down over 87% in a year, falling from highs of 184p to the current 19p. Although most investors are staying away from commodities, this opportunity could be too good to ignore.
E.ON Acquisition
Last week Premier Oil announces the acquisition of E.ONs UK assets for $120m. The portfolio is producing around 15,000 boepd and has 64 mmboe of reserves and resources. The deal will be funded by existing cash flow, and will be paid back in around 2 years. To me this looks like a very smart deal from Premier, and one that will enhance the companys UK business hugely at little cost.
An encouraging piece of information to note is the competition for the assets. Premier CEO Tony Durrant stated that there were multiple parties interested in the assets, but Premier came out as the winner as management wanted the whole portfolio. This to me is a great sign, as it shows that there are multiple parties out there that are looking for assets and deals in the North Sea. This is the perfecttime in the cycle to be acquiring assets, and this deal may kick-start a major year of mergers and acquisitions across the industry.
Importantly for Premier, this acquisition is covenant accretive, whichgives Premier more flexibility with its debt in the future. As I have mentioned, the deal will be funded from Premiers existing cash resources and has an expected payback time of around two years.
Tony Durrant also stated that the company has had its eye on these assets for some time. He further added that this deal would have taken place regardless of Premiers balance sheet or commodity price. This again is positive. Premier has picked these assets up for around $1.9/boe, whichis very cheap, and multiples less than Premier would have had to pay 18 months ago. The assets also come with an attractive hedging programme through 2016 and 2017, too.
The shares are currently suspended due to the transaction being classified as a reverse takeover. The company is in talks with the UKLA, and I expect shares to be un-suspended sooner rather than later. When the shares begin trading, I think it will open significantly higher than the current 19p.
Going Forward
Premier looks okay to stay within banking covenants through 2016 and into 2017, as the company currently has$1.2bn of headroom. Production in the Solan field this year will be key in boostingcash flows and to allow the company to keep debt facilities in place. I have highlighted before how crucial Solan is, and the company updated the market last week stating first oil is now expected to be in February. Last week also saw an upgrade to the Sea Lion discovery in the Falklands, whichwas very good news and should help Premier in the future.
If you are an investor focused on capital growth or simply want to outperform the market, thenthis reportis a must read. It contains details on one growth share that could make superb returns well into the future.
In times such as these, any stock that makes a good return can be invaluable to a portfolio performance. To see what the growth share is included in the report justclick here right now.
The report is absolutely free and will be emailed to you instantly. This could be one of the stocks of the year, so to make sure you don’t miss out justclick now.
Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
