The last time I covered the Premier Oil (LSE: PMO) share price, I concluded that the stock, which was trading at just 4.5 times forward earnings at the time, could double in value in 2019 as the company works on paying down debt and benefits from higher oil prices.
And even though shares in the company have added 33% since I last looked at it, I still think we are looking at a multi-bagger here.
Multi-bagger potential
The Premier Oil share price jumped substantially at the beginning of March when it published its results for 2018.
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Oil production averaged a record 80,500 barrels of oil equivalent per day (boepd) in the period, and the company finally returned to profit. Premier has reported a loss in three of the past four years, so a return to sustained profitability marks a turning point for the group. More importantly, the firm told investors that it has made substantial progress in reducing debt.
Net debt had come down by $393m to $2.3bn at the end of 2018, giving a net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 3.1x, down from 6x. By the end of the year, management is targeting a net debt-to-EBITDA ratio of between 2.7 and 2.8, although a sustained period of high oil prices could help the company exceed this forecast.
Certainly, looking out over the next three to five years, it seems as if Premier will be able to bring its debt firmly under control. Production is expected to hit more than 100,000 boepd by 2024, which, considering the fact that the company managed to pay off $393m of debt last year on production of 80,500 boepd, suggests Premier will have settled all outstanding obligations by the mid-2020s.
With debt falling, investors have already started to return to the company, and with the shares dealing at a 2020 P/E of 6.1 compared to 10 to 20 for many of Premier’s peers, I do not think it is unreasonable to suggest that the stock could rise another 100% or more from current levels.
Making a comeback
Another oil company I also think is significantly undervalued is Tullow Oil (LSE: TLW).
Tullow and Premier have lots in common. Both have been spending heavily to increase their production but were caught off guard by the slump in the price of oil back in 2014. With no other options available to them apart from continuing to invest in the projects they had already started, these two companies accumulated significant amounts of debt between 2014 and 2017, as they spent heavily on projects that were not producing any income.
However, Tullow like Premier is now starting to get its house in order after several years of hard work by management. To reward investors for their patience, the company recently reintroduced a £50m a year dividend policy, and it has reduced net debt 12% since 2017. That’s not much, but it is a start and debt pay-down should accelerate in 2019 as analysts have pencilled in a net profit of $372m, which is more than the business has earned in the past six years combined.
If everything goes to plan, analysts are predicting an increase in net profit of 21% for 2020 to $449m. Based on these targets, the stock is trading at a forward P/E of 10.6, but I think it could be worth much more especially as the company has now brought back its dividend.
