Things are looking up for Premier Oil. In the past seven weeks the North Sea oil producer has made good progress on some of the short-term uncertainties hanging over it (Emily Gosden writes).
Its $871 million package of North Sea acquisitions, announced at the start of the year in a pre-pandemic world, has been renegotiated substantially to reflect the oil price crash. It will still buy the Andrew and Shearwater fields from BP but has cut the upfront payment price by $115 million and reduced the decommissioning liabilities. Yesterday it confirmed it will no longer spend up to $246 million increasing its stake in the Tolmount field from Dana Petroleum.
Premier has secured the backing of troublesome creditor Asia Research and Capital Management, which had opposed the original deal but is backing the revised terms while paying Premier $27.5 million for new shares it is using to reduce its short position. Premier further announced yesterday that all its creditors had approved the BP acquisition.
So far so good, though there is still plenty to do. Premier, which has $1.9 billion of debt, needs to secure the approval of its creditors for waivers of debt covenants that it is likely to breach. That is heading in the right direction, with a committee representing 43 per cent supporting the plan and recommending it for wider approval, expected next week.
It also needs to refinance credit facilities, aiming to push debt maturities out from May 2021 until at least 2023 or potentially longer. Once that is agreed, it will need to raise $180 million in equity — down from the $500 million originally envisaged — to fund completion of the BP deal. A combination of a rights issue and placing is expected before the end of next month.
The rationale for the deal is that it will help boost Premier’s cash flow. Tony Durrant, the chief executive, says that with the BP additions and no optional capital expenditure it should break even at about $25-$30 a barrel next year. Even if oil prices average only $40 a barrel next year — the price Royal Dutch Shell is assuming — that would leave Premier able to pay down a decent chunk of debt, though investing in new projects is unlikely unless prices head north of $50 a barrel.
Even at that kind of price Premier’s most high-profile project — the Sea Lion development in the Falklands — still looks challenged. It needs $42 a barrel to break even and $50 a barrel to deliver hoped-for returns. Mr Durrant is confident it will be developed but as oil majors write off billions of dollars of “stranded assets” in anticipation of a lower-carbon, lower-oil-price world, there are serious questions over the prospects for risky developments in frontier basins. Still, Premier’s share price doesn’t suggest much value attributed to such projects at present.
Seven weeks ago Tempus said to avoid Premier on account of the uncertainty it faced. At that point its shares were 27p, Brent crude was less than $30 a barrel and Mr Durrant said Premier was a bet on the oil price recovery. Since then progress on the BP deal and ARCM, together with a recovery in Brent to over $40 a barrel, have helped Premier’s shares recover to 50p yesterday.
Mr Durrant deserves credit for the progress he has made and, if the deal goes through, it could drive a near-term recovery in the shares. Yet the oil price outlook is highly uncertain and investors must take seriously the prospect that risky and expensive projects like Sea Lion may never happen, or may never deliver promised returns in a greener world. It’s hard to get excited about an investment case pegged to debt repayment and the oil price in a sector that is rightly out of favour among climate-conscious investors.
Advice Hold
Why Progress on BP deal offers short-term upside but long-term outlook remains cloudy
Smart Metering Systems
Britain’s drive towards net zero carbon emissions by 2050 will bring about much change over the coming decades. Millions of people have already agreed to install a smart meter, which helps to monitor energy usage, in their homes but many more of these devices need to be put in by a government deadline of the middle of 2025 (Greig Cameron writes).
The meters are regarded as a key element in measuring energy demand, improving grid flexibility and analysing data on the path to a lower carbon economy.
Smart Metering Systems has a pipeline of two million installations booked in while its customers are thought to have four million devices that need switching over. In March installations halted because of coronavirus but they have resumed.
The Glasgow company began in 1995 offering gas connections to utilities and listed on London’s Aim in 2011 at 60p a share. It now installs and maintains meters in domestic, public sector and commercial premises and works with customers on cutting energy use. It has 1,300 staff in 12 UK locations handling 1.2 million domestic smart meters.
SMS pays for the equipment, but the management fee from each one provides a recurring revenue stream. At May 31 SMS said that it had £75.9 million of index-linked annual recurring revenue.
It sold 187,000 of its older meter assets this year for £291 million in a move that wiped out its debt and will support higher dividends.
The 2020 dividend is pencilled in at 25p, up from 6.88p in 2019, with the company planning to raise it in line with the retail prices index to 2024. SMS had £48 million net cash at the end of May and access to £300 million of banking facilities.
SMS is partnering Columbia Threadneedle European Sustainable Infrastructure Fund to fund carbon reduction energy assets.
The shares have been volatile. After starting the year at 565p they fell to 450p in early March but rose to 660p that month. They have recently been between 580p and 590p. Analysts at Citi have a target price of 760p while Investec, the house broker, believes the shares could go above £10.
Advice Buy
Why Attractive dividend in a sector relatively unaffected by Covid-19
