Premier Oil (PMO:L), the UK based oil and gas company, published its FY15 results on 25 February, reporting a 33% YoY drop in revenue to USD 1.1bn compared to USD 1.6bn in FY14 due to decrease in production volumes and low oil price scenario. During FY15 average production dropped 10% YoY to 57.6K barrels of oil equivalent per day (boepd) versus 63K boepd in FY14, due to portfolio rationalisation which commenced with the sale of the UK North Sea Scott area assets in December 2014, and sale of Block A Aceh in Indonesia and the Norwegian business during 2015. Consequently, following the top line decline, FY15 EBITDAX slumped 30% YoY to USD 752m. Earlier, in August 2015, Premier got its financial covenants amended through June 2017, in anticipation of weak earnings and a possible covenant breach. As per the amendment, Net Debt/EBITDAX test level was modified from 3.00x previously to 4.75x until FY16, 4.50x for 1H17, post which it returns to its pre-modified level of 3.00x for FY17. Similarly, interest coverage ratio test was amended to 3.00x until 1H17 and 4.00x in FY17. Net debt as at 31 December 2015 stood at USD 2.2bn, 5% higher compared to FY14, taking net debt/ EBITDAX for the period to 2.95x versus 1.97x in FY14.
In January 2016, Premier oil made an announcement to acquire E.ON’s oil and gas production assets in the North Sea for USD 120m plus working capital adjustments. The deal is said to be financed through the proceeds of USD 120m that Premier received in December 2015 from the aforementioned sale of its Norwegian assets, which were undeveloped oil fields and required further investment to commence production However, E.ON’s assets will immediately add around 15k boepd of oil and gas production to Premier’s output and boost its cash flows. Further, 1/3rd of E.ON liquid production is hedged at USD 97 per barrel which would benefit Premier in this oil price turmoil. Moreover, operating cash flow from the new assets will not be taxed in the near future, as Premier has USD 3.5bn of historic tax losses it can set against UK production. However, in order to finalise the deal, Premier voluntarily suspended its share trading from 13 January 2016 to 31 January 2016, as the said acquisition was classified as a reverse takeover under the UK law. The transaction completion is still subject to approval by Premier’s shareholders in March or April and Premier’s lending group. Amongst other synergies, the acquisition would provide additional headroom on the amended covenants. As stated by Premier’s management, the E.ON deal should increase the group’s borrowing limit by around USD 500m in 2016.
Operating cash flow (OCF) for FY15 was down 12.4% YoY to USD 810m due to abovementioned drop in EBITDAX, while free cash flow improved to negative USD 54.7m versus negative USD 239m in FY14 owing to 17.1% decrease in capex and cash inflows owing to asset disposals during the year. Going forward, the company would continue to invest in its approved projects, Solan and Catcher which are expected to start production in 1Q16 and mid-2017, respectively. Further, the company is looking to reduce its capital costs and hence has put its unsanctioned projects under review. However, looking at the current oil prices it is less likely that Premier would generate enough cashflow to cover its capex spending in FY16 which is expected to be around USD 700m. This may require the company to make additional drawings under its credit lines during 2016. Although with the Catcher project expected to come on stream in 2017 and capex being reduced to USD 400m, a positive FCF is expected 2017 onwards.
As at 31 December 2015, the company reported liquidity of USD 1.2bn comprising of cash and undrawn credit facilities opposed to no significant maturities before 2017 when a USD 307m of repayment is due. Further, management also stated that it is in process of selling its Pakistan business which would increase liquidity in the short term but will stop the cash flow generated through these assets. Looking ahead, production for FY16 is expected to average 65-70k boepd including contribution from E.ON’s assets and the Solan project in the coming months. As a result, this incremental production and smart hedging is likely to support FY16 revenue of USD 1.3bn. The company also expects to save around USD 50m through reduction in opex and general and administrative expenses during FY16. In conclusion, integration of E.ON’s assets, timely delivery of its key projects, conservative capital spending and successfully shielding EBITDAX through cost cutting would determine the company’s fate in the next few years.