Oilexco investors should consider Premier Oil
In the first quarter of 2009 the economic environment was very weak. Getting debt or equity financing would have been at very unfavorable conditions to an issuer. It is in that environment that Premier Oil (Premier) saw the opportunity to grow through acquisition. A strong balance sheet and cash from record oil prices early in 2008 enabled Premier to carry forward with opportunities to acquire assets. The North Sea assets of Oilexco are one of two transactions that Premier made then. In this note, we look at the takeover parameters, some of the projects Premier inherited from Oilexco, price behavior the shares and other considerations.
Takeover of Oilexco North Sea Assets
Oilexco, a favorite of many Canadian analysts and investors, was forced to liquidate in 2009 as the Oil price declined rapidly from $147.90 in mid 2008 to $35.17 at the end of that year. With 242.5 m shares outstanding (globeinvestor.com), the company enjoyed a market capitalization of over C$4.7 billion at the June 2008 share price peak of C$19.5 . The enterprise value which includes corporate debt exceeded $5 billion as the Canadian dollar hovered above parity relative to the US dollar.
With the decline in Oil prices, and in late 2008 to early 2009, Oilexco was not able to raise the capital it needed to survive as a standalone entity. The company had to look for strategic alternatives which included the sale of it’s assets. At that time, fund manager John O’Connell from RBC Mutual funds suggested on BNN’s marketcall that one possible scenario would be C$5 per share or close to C$1.25 billion for the company. Including the debt then of over $500m, the takeover would have exceeded C$1.75 billion. In fact, valuation metrics were outlined by Oilexco in February 2009 based on reserve estimates from Sproule International Limited. The net asset value (NAV) of proven reserves of 39,164 mmboe is $1.014 billion (before tax, using a 10% discount rate). The numbers are significantly higher when probable and possible reserves are considered.
The takeover cost Premier just over $500 m. This is less than half the NAV of proven reserves with no value attributed to possible and probable reserves. It is just 10% of the peak valuation given to Oilexco in Q2, 2008. Premier also inherited tax losses of over $1 billion. Richard Griffith of Evolution Securities suggested that the after-tax cost of the transaction to Premier can be substantially less that the $500 m price tag depending on utilization of these losses. The after tax cost may end up being a fraction the amount paid (20% to 40%). Unfortunately, for Oilexco investors, $500 m was not sufficient to cover the company debt and shareholders were not compensated. (for more on the reasons for OIL’s demise see “A death in the oil patch” by Toby Shute).
While Premier has a longer history history than Oilexco, it is a relatively small company. Premier currently has shares outstanding of 116.4 m. Before the share issue subsequent to the Oilexco takeover of 35.3 m shares, Premier had 81.1 m shares outstanding. This gave the company a market capitalization of £631 m or $902 m at the close on 24 mar 2009. It is therefore obvious that the acquisition was very significant to the company and came with an extremely favorable price tag. This was expressed in the May 29, 2009 – annual general meeting statement: “The highlight of our year was the acquisition, completed last week, of the North Sea assets of Oilexco. These assets more than double our production and triple the size of our reserve base in the North Sea”.
Results in the North Sea, 2nd Quarter 2010
Since the Oilexco transaction and in the following 5 quarters, Premier followed up on a number of projects:
Shelley
The Shelley field was one of the reasons Oilexco had to look for a buyer. The commitment to the Sevan Marine FPSO (floating, production, storage and offloading) vessel was significant and considered uneconomic. Premier started production in the summer of 2009 after re-negotiating the contract with Sevan Marine. Since then, production from Shelley has declined rapidly and may cause Premier to shut the production and decommission the wells in that field.
Bugle
Bugle was one of Oilexco’s exploration highlights of 2008. Operating partner Nexen continues to evaluate this prospect. Recent results were not very promising.
Catcher
While Shelley and Bugle have not shown the kind of promise originally expected, the results from Catcher have been extremely positive. The company 2009 annual results presentation indicate Catcher’s potential at 18-33 mmboe (million barrels of oil equivalent). However recent exploration shows Catcher has a much better potential than initially thought.
In the recent weeks there has been a number of news items regarding Catcher. Recent results suggest Catcher’s potential may be more than three times the original estimate. Premier holds 35% of Catcher and these results may explain the increase in the share price against a weak market backdrop.
Price behavior of Premier shares
Since late April the markets have been weak. This is true also about European markets. Since the April highs, London’s FTSE index has declined by 1083 point (17.9%) to the end of June before recovering somewhat in July. During the same period, Premier shares have managed to hover near all-time highs. This is a clear indication that despite the market weakness there are buyers for quality companies. The weakness in markets is not driven by redemptions and lack of liquidity.
chart courtesy of stockcharts.com
Premier for Canadian investors
- Premier is listed on the London Stock Exchange (LSE). Most Canadian investors have convenient access to US and Canadian markets. With major non-North American companies almost always one can buy an ADR (American depository receipt) on a US exchange or shares through the pink sheet dealer market. This does not appear to be the case with Premier. Hence, the only choice is to buy directly on the LSE.
- Most brokerages do provide access to international markets through a dedicated trading desk. The commissions are high and trades are communicated manually in most cases. There are, however, brokers in Canada that offer direct access to international markets. Investors who envision more of these types of transactions in their portfolios can look into their services.
- An important difference regarding the LSE is the stamp duty on buying shares. The tax is 0.5% and has to be taken into account for this type of investment.
- Note that Premier continues to be followed by Canadian brokerages (BMO, RBC and Canaccord).
Conclusion
Premier is involved in the exploration and production of conventional oil and gas. The company is targeting growth of 60% over 2 years (to 75k boepd from the current 46.6k boepd). The price behavior of the shares in a difficult environment continues to show a favorable supply/demand dynamic. The takeover of Oilexco assets provided the company with an exceptional opportunity to grow in the North Sea. The takeover also demonstrates that management is prudent and able to capitalize on opportunities presented to them. While Oilexco was a big disappointment for investors, the recent results provide insight into what could have been. Canadian investors may want to consider Premier to participate in the growth once promised by Oilexco.
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