Overview
Premier Oil PLC (PMO) is an international oil and gas production and exploration multinational, headquartered in London, United Kingdom.  The company has oil and gas interests in the Falkland Islands, the North Sea, Latin America, and South East Asia. Today, the group's operations span across several countries, with producing interests in the United Kingdom, Indonesia, and Pakistan. The company is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.
As opposed to the 'downstream' refining and retail sector, the company is majorly engaged in the 'upstream' sector of the industry – the exploration and production segment (oil and gas). The company seeks to successfully explore new reserves to replenish its reserve and resource base. The high-quality portfolio of the company provides it with organic growth opportunities. The company has a long and established history of executing development projects, with future production growth dependent on Catcher and Tolmount in the UK and the first phase of the Sea Lion project in the Falkland Islands. The company seeks to generate cash flows by maximising value from its low cost, stable production base and has assets in Indonesia, Vietnam and the UK.

Key Statistics

Management
Roy Franklin is the Chairman of the Board; he has more than 40 years’ experience in the industry. Robin Allan is the Director of the North Sea and Exploration; he has a deep understanding of the company’s operations as he has held many senior positions at Premier in the last 30 years. Tony Durrant is the Chief Executive Officer of the group; he joined the group in 2005.

Segments
The company's operations are differentiated according to five geographical segments: the Falkland Islands, the United Kingdom, Vietnam, Indonesia, and the Rest of the World.

Top Shareholders
 
(Source: Thomson Reuters)

Recent Development
On 28^th March 2019, the company announced the Completion of sale of its Pakistan business, Premier Oil Pakistan Holdings BV, to Al-Haj Energy Ltd. The full consideration of $65.6 million has been received by the company for this sale.

Key Financial Highlights (FY 2018, $ Mn)

Source: Company Website, Financial Report

In the financial year 2018, the operational delivery of the group remained strong with the company achieving its best full year of production despite material asset sales, averaging 80.5 kboepd (2017: 75.0 kboepd). The rise in production was driven by continued high operating efficiency across the portfolio and new production from Catcher Area. Strong production led to higher cash flows and a return to profit, amid oil price volatility throughout the year: prices increased during the first three quarters of 2018, peaking at $86.2/bbl, before falling steeply to $50.2/bbl. The group realised an average oil price of $67.9/bbl during the year, against $52.9/bbl realised in 2017. Total revenue from all operations, which includes Pakistan, increased from $1,102 million reported in 2017 to $1,438.3 million in 2018, while revenue from continuing operations (excluding Pakistan) rose to $1,397.5 million from $1,043.1 million in 2017. In 2018, total operating costs at $16.9/boe were below the low end of $17- $18/boe guidance. Due to higher production and realised prices during the year, EBITDAX for 2018 from continuing operations surged by 50 per cent to $882.3 million against $589.7 million for 2017. Net Profit after tax was $133.4 million, rising from a loss of $253.8 million reported in 2017. This resulted in a basic EPS (continued and discontinued business operations) of 17.3 cents, versus a loss of 49.4 cents in 2017, reflecting an increase in sales revenue and the subsequent impact on operating profits. Driven by higher production, sales volumes and realised prices, the cash flow from operating activities increased considerably from $475.3 million in 2017 to $777.2 million in FY18. Capital expenditure in 2018 stood at $279.8 million. Capital expenditure for activities in 2019 is expected to be around $340 million. Due to strong cash flow generation and the successful conversion of the group's convertible bond notes during the year, the company reduced its net debt by $393 million to $2.3 billion, indicating that debt reduction remains a key corporate priority. Covenant leverage ratio (covenant net debt / EBITDA) stood at 3.1x at the end of the year and declined significantly against 6.0x reported in FY17.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
Helped by strong production and cost efficiency, the group returned to profit in 2018. This reflected in profit margins as well, which rose considerably during the year. Operating margin rose to 38% in 2018 from 3.2% in 2017. The Company reported a positive return on equity of 12.8% in FY18 from a negative return of 37.9% reported last year in FY17. The liquidity position improved significantly and was above the industry median at the end of the year. A small difference between quick and current ratio signifies a large part of current assets are held in liquid assets. Although the company is still more leveraged than its peers, it improved its position considerably in 2018. The company has also improved its asset turnover ratio, reflecting a better utilisation of resources.

Valuation Methodology

Method 1: EV/Sales Multiple Approach (NTM)


Method 2:EV/EBITDAMultiple Approach (NTM)
 
To compare PMO with its peers, EV/EBITDA multiple has been used. The peers are Ophir Energy PLC(NTM EV/EBITDA was 1.97), Genel Energy PLC(NTM EV/EBITDA was 2.4),EnQuest PLC(NTM EV/EBITDA was 2.83), Amerisur Resources PLC(NTM EV/EBITDA was 4.27) and Tullow Oil PLC(NTM EV/EBITDA was 5.59). The mean of EV/EBITDA (NTM) of the company’s peers was 3.41x (approx.).
*All forecasted figures and Peers information has been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at April-03-19, before the market close (Source: Thomson Reuters)

On April 03, 2019, at the time of writing (before the market close, at 11:00 am GMT), PMO shares were trading at GBX 99.43, up by 1.3 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 146.9/GBX 54.7. At the time of writing, the share was trading 32.31 per cent lower than its 52w High and 81.77 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 8,473,314.20; 30 days – 8,195,987.40 and 90 days – 10,196,403.00. The average traded volume for 5 days was up by 3.38 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 16.2x. The company’s stock beta was 3.45, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £805.13 million.

Risks Assessment and Growth Prospects
 
The company's financial performance is heavily dependent on oil and gas prices. Since the company has no control over global supply and demand, the prices can be subject to significant fluctuations. These fluctuations can affect the company's ability to deliver on its strategy and impact the business assumptions. Actions by major oil-exporting companies, political and security instability, economic conditions, adverse weather can lead to an adverse impact on the company's financials. Political instability and change in fiscal regulations in the countries where the company operates also has the potential to impact the company's performance. However, the company is well placed to deliver maximum value from its existing production and sanctioned developments, as the company has focused on operational delivery together with cost and capital discipline. The company has reduced its debt considerably and seeks to improve its leverage position further, helped by selective investment in new projects such as Tolmount, Sea Lion and Zama. Production from the company's UK assets, which accounts for more than half of the total production, grew considerably in 2018. Helped by Catcher Area, strong performance is expected to continue in 2019. Moreover, the demand for Indonesian gas from Singapore remained robust. Under the long-term gas sales agreements, significant opportunities remain to develop and deliver additional resource into the Singapore market, underpinning company's confidence in the longer-term cash flow generation potential of this asset.

Conclusion
The low-cost base and a disciplined Capex programmeundertaken by the group has resulted in strong operational performance and will further help in generating material free cash flow. Production is also expected to increase, and the group seeks to reduce its debt further. Based on strong prospects supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 98.2 (as on 2^nd April 2019) with high single digit upside potential based on 3.41x NTM EV/EBITDA Value (approx.) on FY19E EBITDA and 2.10x NTM EV/Sales (approx.) on FY19E Sales.
 
*The buy recommendation is valid for the current price as covered in the report (as on April-03-19).
 

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