Premier Oil plc (PMO.L) engages in the exploration, development, and production of oil and gas properties. The Company’s operations are located and managed in six business units: the Falkland Islands, Indonesia, Pakistan (including Mauritania), the United Kingdom, Vietnam and the Rest of the World. In total, the Company manages approximately 760 million barrels of oil equivalent (mmboe). The Company has production rates of over 90 thousand barrels of oil equivalent per day (kboepd). The Company focuses on producing 68 to 73 kboepd. The Company’s four-well North Falklands Basin campaign targets multiple stacked fans in PL004 and PL032 using the Eirik Raude rig. The Company owns an interest in over two licenses, such as Natuna Sea Block A and Kakap.
On November 17th 2016, PMO updated on trading and half year results. The group reported an average production during the first half of 69 kboepd year-to-date. At the time of results, the current run rate was >80 kboepd, and PMO confirmed it was on track to meet previously increased full year guidance of 68-73 kboepd. CEO Tony Durrant said the company was “continuing to deliver operationally against a challenging commodity price backdrop.” He pointed to how PMO was “benefiting from a step change in production with a significantly lower cost base.”
The group debt position is currently being renegotiated with its lenders, and PMO expects to update shareholders in a further update on January 12 2017.
The potential valuation upside in PMO had been highlighted by VectorVest financial and technical metrics when the stock pulled back to around 50p in November 2016. The VectorVest valuation metric highlights a value of 95.53p per share, meaning it remains undervalued at the current 75.50p per share.
The stock also demonstrates a forecasted Earnings Growth Rate (GRT) of 21.00%, which VectorVest considers to be excellent. A word of caution – the Relative Safety metric (RS) is 0.94, which is fair on a scale of 0.00 to 2.00. A stock with an RS rating greater than 1.00 is safer and more predictable than the average stock in the VectorVest database.
The chart of PMO.L is shown above with the price in candlestick format. The green line above the price is the VectorVest valuation while the blue line in the window below the price is earnings per share (EPS).
Presently the share is trying to break out of an inverted head and shoulders reversal. The target from this pattern should take the share to around 110.
Summary: Although not without a degree of risk, VectorVest sees significant upside potential in PMO, and currently considers the stock as undervalued. In addition, the trading statement and progress on debt negotiation update due on January 12 2017, is expected to be a key trigger event for the share price. Buy.
Dr David Paul
January 5th 2017
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