Trading and Operations Update

PREMIER OIL PLC

("Premier")

Trading and Operations Update

14 January 2015

Premier today provides a Trading and Operations Update ahead of its 2014 Preliminary Results which will be announced on Thursday 26 February 2015. 

Tony Durrant, Chief Executive, commented:

"Premier is in a strong position to weather a period of oil price weakness due to its long term cash flow generation. This is delivered from a stable production base with low cash operating costs (

Operationally, Premier delivered a strong performance in 2014, with production exceeding guidance, key milestones reached on a number of our development projects and non-core assets disposed of in a difficult asset market.

We will continue to invest in high quality projects only if they are robust at our conservative oil price assumptions and if their cost base reflects the current oil price environment."

Production

In 2014, Premier achieved record production of 63.6 kboepd, up 9.3 per cent on 2013 and above the upper end of guidance. This strong performance was largely driven by success across the portfolio in improving uptime.

UK production increased by 30.2 per cent to 19.4 kboepd. This was due to improved operating efficiency from the Premier operated B Block, flush production from Kyle and increased contributions from Huntington and Rochelle. However Huntington, our principal non-operated asset, continues to suffer from poor uptime due to operational issues and gas export restrictions imposed by the CATS pipeline operator BP.

In Vietnam, outperformance was achieved from our operated Chim Sao asset with record production of 19.3 kboepd (net to Premier) during November and December. The subsea tie-back of the Dua field was completed in July, extending plateau production and the field life of Chim Sao.

Higher production from Indonesia was driven by strong performance from Natuna Sea Block A which captured 44.6 per cent of GSA1 deliveries, against a 2014 contractual share of 39.4 per cent. The Naga field was brought on-stream in November while Pelikan will be bought on-stream in April providing further deliverability from Natuna Sea Block A.

Production in 2015 from our existing producing assets, excluding new production from the Solan field, is expected to be around 55 kboepd, reflecting the impact of the sale of the high cost producing Scott area in the UK North Sea and some natural decline in our portfolio. There will be an additional contribution to 2015 production from Solan, the extent of which is dependent upon the timing of first oil from the field.

Development projects

The tank, jacket and topside facilities for the Solan field were installed West of Shetlands at the end of the summer. Hook up and commissioning of the facilities has been hampered by poor weather conditions over the winter period. Premier is targeting first oil from the field in the second quarter of 2015 with precise timing dependent upon the further progress of the commissioning programme. Once both producers are on-stream, the field is expected to achieve peak production rates of up to 24 kbpd (gross).

Cash spend to 31 December on the Solan project stood at $1.4 billion. Premier is funding partner Chrysaor's share of capex in return for 100 per cent of the field's cash flows once on-stream until the loan and interest has been repaid. Meanwhile, Premier continues to work with Chrysaor over the partial refinancing and/or sale of the loan to Chrysaor. As at 31 December, the outstanding loan and interest stood at $547 million.

The Premier-operated Catcher project received government approval in June and construction of the FPSO hull started earlier this month in Japan. Preparations for development drilling are well advanced with the campaign on track to commence in the second half of the year. The project continues to progress on schedule and to budget.

On our operated pre-sanction projects, FEED work on the Bream (now renamed Vette) FPSO development in Norway is nearing completion with a Plan of Development expected to be submitted to the Norwegian Petroleum Directorate later this month. Negotiations with key contractors around costs are on-going and a formal sanction decision will be required later this year.

Following the selection of a smaller, lower capex solution for the first phase of the Falkland Islands' Sea Lion project, work is progressing on assessing the FPSO design options.

Exploration and appraisal

Exploration successes in 2014 comprised a gas discovery at Kadanwari in Pakistan which was subsequently tied into production in April and the oil, liquids and gas discoveries at Kuda Laut and Singa Laut on the Tuna Block in Indonesia. In the light of the low oil price environment Premier has deferred 2015 discretionary drilling expenditure with uncommitted rig contracts. Premier plans to drill eight exploration wells in 2015. Drilling is underway on the potentially play opening, low cost Badada-1 well onshore Kenya and the high impact, four well Falkland Islands exploration campaign is on track to commence in March. The Myrhauk well, Premier's first test of the emerging Mandal High play offshore Norway, is expected to spud mid-year.

Portfolio management

During 2014, Premier continued to monetise its non-core assets. This included the sale of Premier's non-operated interests in the Scott area assets in the UK North Sea for $130 million before interim adjustments and the Luno II discovery in Norway for $17.5 million plus working capital adjustments. Both sales completed in the fourth quarter of 2014. In addition, the previously announced disposal of Premier's non-operated interest in Block A Aceh completed on 12 January for $40 million plus working capital adjustments.

Premier also continued to high grade its exploration portfolio and reduce its future exploration commitments where appropriate. Over the course of 2014 some 20 licences, predominantly in the UK North Sea, were either sold or relinquished.

 Financial

The estimated average oil price realised for 2014 was $98.2/bbl (2013: $109.0/bbl) (pre hedge) and $101.0/bbl (2013: $109.1/bbl) (post hedge) compared with an average Brent crude price of $98.9/bbl. Estimated average gas prices (pre hedge) for our principal gas producing areas for 2014 were: 

For 2015, Premier has sold forward 5.43 mmbbls of Dated Brent and 84,000 mt of high sulphur fuel oil at an average price of $98.3/bbl and $614.4/mt, respectively. This represents approximately 40 per cent of estimated oil price sensitive base production (excluding Solan volumes) for this year.

Total revenues for 2014 will be in the order of $1.6 billion (2013: $1.5 billion). As a result of the low Brent crude oil spot and forward curve price at year end 2014, there will be a material impairment charge in the second half on certain of our assets. This is currently estimated at $300 million on a post-tax basis.

Operating costs and G&A spend are already budgeted to be at least 10 per cent lower than in 2014 and a number of initiatives are underway to target significant further cost reductions.

Capital spending for the full year 2014 was approximately $1 billion (development) and $160 million (exploration, pre-tax). Planned development spend for 2015 is anticipated to be 40 per cent lower at around $600 million. In the light of the low oil price environment, negotiations with a number of key contractors are underway and development expenditure estimates are therefore subject to further review. The pre-tax exploration budget for 2015 is $220 million.

Premier took advantage of relatively strong bank markets in the first half of 2014 to refinance its principal $1.2 billion facility with a new, increased facility of $2.5 billion on improved terms with extended maturity. Premier does not have any significant debt maturity until late 2017 and our corporate unsecured capital structure means that we are not subject to any reserve base redeterminations. As at 31 December, cash and undrawn facilities stood at $1.9 billion and net debt was $2.1 billion. The Group continues to benefit from its substantial UK corporation tax loss and allowance position with estimated losses and allowances of $2.8 billion carried forward at 31 December 2014. Cash taxes as a percentage of gross operating cash flow in 2014 is estimated at around 20 per cent.

During 2014, Premier purchased 18.4 million shares at a volume weighted average price of 302.0 pence. In December, a decision was taken by the Board to postpone the buyback programme pending a recovery in the oil price.

Table 1: 2015 firm exploration and appraisal drilling programme

*Prospect size only