11th May 2016 11:59
LONDON (Alliance News) - Premier Oil PLC Wednesday said its recently-completed development project and the string of assets that have been acquired in the UK North Sea will allow it to exceed its production targets this year, adding costs are continuing to fall in tandem.
"Strong production performance from our existing assets, together with the contribution from the E.ON assets and the Solan field means that we now expect production for the year to be better than we originally anticipated," said Chief Executive Tony Durrant.
Premier Oil said oil production in the first four months of the year averaged 57,300 barrels of oil equivalent per day, falling from 60,200 barrels of oil per day in the corresponding period a year earlier.
Production is also slightly lower than the average production rate over the whole of 2015 of 57,600 barrels per day.
Still, Premier Oil is confident it can "deliver at or above upper end" of its full-year guidance of 65,000 to 70,000 barrels of oil equivalent per day - with production set to significantly increase throughout the remainder of the year.
Two of the company's four geographical regions provided production growth in the first four months of the year, with its UK North Sea assets reporting an increase thanks to its new project coming online whilst Indonesia reported a smaller rise thanks to the Natuna Sea Block A delivering results that were ahead of expectations.
Production from Pakistan and Mauritania dropped to 8,300 barrels a day from 10,900 barrels a day. Notably, Premier Oil is in the process of selling its entire business in Pakistan following an unsolicited approach last year, and on Wednesday said a number of bids have been received and are being progressed.
Operations in Vietnam saw production decline to 17,400 barrels from 20,000 barrels a day, and although total production from Vietnam is down, Premier Oil said the Chim Sao field has been delivering ahead of expectations through high uptime and good reservoir performance.
On the flip side, production from Indonesia in the first four months of the year rose to 14,000 barrels a day from 13,200 barrels whilst UK production averaged 17,600 barrels per day compared with 16,100 barrels a day a year ago.
That means the North Sea is currently the biggest contributor to the company's production and the area will also experience the largest rise this year as the majority of overall production growth in 2016 will come from the Solan field, which began producing in the Middle of April, and the new assets that were formally acquired for USD135.0 million from E.ON at the end of April.
Currently, Solan is producing over 14,000 barrels of oil equivalent per day from only one producing well, with a second well expected to come online in the middle of this year, which will result in production rising to 20,000 to 25,000 barrels a day in the second half of the year.
Premier Oil was originally hoping to hit that production range in the first half of the year, but Solan has faced some delays.
The assets purchased from E.ON in the North Sea was completed on schedule at the end of last month, meaning production from those assets will be consolidated from completion.
Premier Oil said the E.ON assets produced 17,000 barrels of oil equivalent per day in the first four months of 2016, which, alongside the ramp-up at the Solan field, will help Premier Oil to meet or even beat its production guidance this year, with the second half of the year set to be significantly better than the first.
Premier Oil continues to remains focused on its North Sea portfolio through its major Catcher development project. Much like Solan, the Catcher field will be a key driver of further production growth in 2017, but fortunately Catcher has not faced any delays and remains on track to begin producing in the second half of 2017.
The Catcher project is also under budget after Premier Oil revealed it has managed to make a severe cut to the amount of capital needed to get the asset to first oil. The company said the overall budget has been slashed by 15% from the original budget when the project was sanction, and now stands at USD1.35 billion.
The company said the cost savings have been derived from renegotiating contracts and by re-phasing some contractor payments, which it was able to do thanks to the good progress being made in the subsea installation programme, which is ahead of schedule, and the drilling results from the asset.
The overall budget for Premier Oil's exploration and development work in 2016, which is mainly comprised of the capital expenditure needed for the E.ON assets, is expected to be around USD730.0 million.
In addition, Premier Oil's group operating costs will be 10% to 20% lower than what was budgeted for the year, and its general and administrative expenses have also continued to fall and are set to come in 10% below the company's budget for 2016.
Importantly, the forecast covering general and administrative costs does not take the E.ON acquisition into account, meaning Premier Oil will not achieve a 10% reduction unless it takes further measures.
Operating costs are a key focus for the wider oil and gas market as they attempt to improve margins during lower oil prices. Premier Oil said its operating cost per barrel is expected to fall to around USD17.0 per barrel of oil equivalent once the E.ON and Solan assets are taken into account - providing a decent margin at current prices.
Brent was trading at USD46 per barrel on Wednesday morning.
As costs go down, Premier Oil is also securing higher prices for portions of its production through its hedging programme, with some of the hedges being acquired from the E.ON assets.
Premier Oil has 4.8 million barrels of oil hedged at USD62 in 2016 and a further 770,000 barrels from the E.ON assets hedged at USD97.4 per barrel - meaning the total hedges in place in 2016 cover over 5.5 million barrels of oil at an average price of USD67.
There are also another 1.5 million barrels hedged for 2017 at a price of USD45.8 per barrel - not far away from current prices.
Following recent talks with its lenders, Premier Oil has headroom through its undrawn credit facilities totalling USD750.0 million, with no significant debt maturities until late 2017, when the company is hoping to be producing considerably more oil and selling it at a higher price.
Premier Oil's unsecured credit facility does not require any reserve base determinations to be carried out, but Premier Oil said current, weaker oil prices means it may have to relax its main financial covenants in respect of the testing periods ending on June 30 and December 31, 2016.
"Premier continues to explore mitigating actions that can improve its forecast financial covenant position and, in addition, has entered into discussions with its lending group with a view to agreeing amendments to its financial covenants," said the company.
Premier Oil shares were down 1.8% to 68.50 pence per share on Wednesday, and the stock is trading over 41% higher than it was at the end of 2015.
By Joshua Warner; [email protected]; @JoshAlliance
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