12th Mar 2020 14:51
(Alliance News) - A Hong Kong-based hedge fund on Thursday called on Premier Oil PLC to abandon its planned acquisitions in the North Sea.
Premier's shares were 35% lower on Thursday afternoon in London at 14.91 pence each. They have lost more than 80% in the past five days.
Premier announced in early January the purchase of the Andrew Area and Shearwater fields in the UK North Sea from oil major BP PLC. It also is upping its stake in its existing Tolmount field.
The acquisitions are to cost the company a combined USD820 million. A court hearing is scheduled to start Tuesday next week to decide whether or not to sanction the deal.
However, Asia Research & Capital Management, which is Premier's largest creditor but also has a 17% short position on Premier's shares, has - not for the first time - called on the firm to abandon the acquisitions to focus on its balance sheet and cash flow.
"As per ARCM's previous statements, we believe Premier Oil should be focusing on its cash flow position and protecting the balance sheet as a matter of priority," the lender said.
"We encourage the company to engage with its creditors to find a long-term solution which would significantly reduce leverage and provide a stable balance sheet, from which the company could then prudently pursue growth opportunities."
Premier made no comment on the ARCM statement Thursday when contacted by Alliance News.
In February, Premier said over 80% of creditors had backed the lending arrangements related to the acquisitions, but ARCM was said to be "deeply concerned".
"ARCM believes there are important questions relating to the acquisitions, the answers for which remain unclear," ARCM said at the time.
"Over the last few months, energy assets have de-rated significantly due to fundamental changes in the UK/European gas markets and global oil markets. Lower forward commodity prices will not only reduce the cash flow available to Premier Oil from the proposed acquisitions but, if sustained, would likely result in the acceleration of decommissioning liabilities," said ARCM on Thursday.
"This would put further pressure on the company's balance sheet and significantly increase the company's risk profile."
"These acquisitions were negotiated in the autumn of 2019 using forward prices of around USD70 per barrel for Brent and 50 pence per therm for UK gas. We believed these estimates were unrealistic at the time and are even more unrealistic today," ARCM continued.
A barrel of Brent oil was quoted at USD33.66 on Thursday afternoon. Oil has slumped this week after major oil producing nations were unable to agree on production cuts to prop up the price, which originally slumped due to the fears over the Covid-19 virus's economic impact around the world.
Premier reported annual results last week, showing a 35% fall in pretax profit despite 13% revenue growth. Production was 78,400 barrels of oil equivalent per day, at the upper end of guidance.
In 2020, Premier sees production between 70,000 barrels a day and 75,000 barrels a day.
The 2020 budget, ARCM said, has been set at a USD60 per barrel oil price. Based on this, ARCM said Premier has projected for no "meaningful" cash flow in 2020.
"The current forward curve for the rest of 2020 is USD42.7 per barrel, USD17.3 per barrel lower than the company's USD60 per barrel estimate. In its full-year presentation on March 5, the company stated that every USD5 per barrel change in the oil price results in a USD60 million change in free cash flow," ARCM continued.
"Based on the current forward curve, the company's cash flow position would therefore be around USD200 million worse than what it projected in its recent full-year results presentation. This compares to cash on balance sheet of USD151 million at the end of December 2019."
This cash on balance sheet figure of USD151 million stated by ARCM does not include USD398.2 million of undrawn facilities.
By George Collard; [email protected]
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