Stock of the day 13/01/2015 – Premier Oil PLC

The speedy decline of oil has dominated economic news recently, and will make itself felt on Premier Oil’s trading statement release on Wednesday.

With oil reaching a peak price of $114 in June, Premier Oil had an excellent start to 2014. After opening the year at £3.13, shares maintained a steady climb until June, where prices reached their year-high of £3.59. The company managed to sustain levels around this price until the start of October, when things began to take a turn for the worse. Premier Oil’s steep decline was consistent with oil’s own plummet, and by mid-December Premier Oil was trading at £1.47. Things picked up at the year’s close, hitting a price of £1.67; however, 2015 has been equally has infected as last year, and share prices have already reached £1.32, surpassing 2014’s low less than 2 weeks into the New Year.



Ahead of its trading statement tomorrow, Premier Oil is caught between the abysmal performance of energy stocks in the face of abyss oil has fallen into and its own internal state of affairs. The reaction of investors will be dependent on how much leeway is given to the fact that Premier Oil is part of a struggling sector, and whether the potential for its own good news can break through the oil slick that has coated the markets.

The company has nearly completed the reorganisation of its portfolio which will raise $300 million, is nearing the start of production at Solan field, of which it owns 60%, and has managed to find a less expensive way of developing its Sea Lion field near the Falklands. It has also ramped up its output in Vietnam and Indonesia. Yet despite these positives, Premier Oil’s big struggle is in the North Sea.

According to Robin Allan, a director at the company and chairman of UK’s independent explorers’ association Brindex, the industry is close to collapse as it’s ‘almost impossible to make money at these oil prices.’ This is especially applicable to North Sea operations, due to the tax hikes imposed by George Osborne post-peak oil. The North Sea oil industry is now insisting on an emergency tax cut, something that would see tax for new developments fall to 30% from 60%. Yet with the benefits of cheap oil slowly being felt by the average customer, this is helping the government obscure its own failures to make wage increases for the UK public and Osborne and co. may be unwilling to make such cuts.

Goldman Sachs recently decreased its target price for Premier Oil from £3.25 to £1.39, a price just above its recent low. However, the stock still has an average rating of ‘buy’, and a consensus target price of £3.15, despite oil’s own outlook being downgraded to $50 per barrel from $80 for 2015. With the sector it belongs to crumbling under the pressure of oil’s descent into darkness, Premier Oil’s fate will depend on how convincing it is in reassuring investors that it is managing to deal with the commodity’s decline.