Premier Oil held a capital markets day on Thursday 6 Feb 2014. The management presentation revealed subtle changes to strategy and provide more detail on the company’s soon to be sanctioned development projects: Catcher and Sea Lion.<p>
<b>YTD Production above guidance</b><p>
There were no changes to management’s FY14 production guidance of 58 to 63k boepd. However production for January 2014 at 66k boepd was above guidance in spite of some planned shutdowns in some North Sea wells. Because of changes in product mix in FY 2014 (more oil less gas), production at the lower end of management’s guidance should see a 14% increase in YoY increase in operating cash flow.<p>
<b>Subtle changes to strategy</b><p>
The presentation also indicated some subtle changes to strategy. Going forward, the company will only focus on higher return investments, reduce its capex exposure and emphasize balance sheet strength. As a result, it intends to raise c. $300m by disposing some its undeveloped North Sea assets and will limit capex exposure to Sea Lion by farming out prior to FID. We value the company’s unsanctioned North discoveries (Luno II, Bream and Bonneville) at $275m in Premier Oil’s risked NAV. However, it might struggle to dispose of the North Sea assets in the current market. We see the company’s Asian assets as more attractive. <p>
<b>More detail on soon to be sanctioned projects</b><p>
Management gave more detail on the development concepts for its soon to be sanctioned projects: Catcher in the North Sea and Sea Lion in the Falklands. Catcher development has been sanctioned by the board and a development plan expected to be delivered to the DECC soon. First Oil is expected mid 2017. The estimated reserves at 92mmboe was in line though it indicated a possible upside to 140mmboe depending on field recovery. Gross capex at $2.2bn was higher than our estimate of $1.6bn though the company’s forecast includes a 30% contingency. Capex to first oil at Sea Lion is estimated at $3.8bn, slightly higher than out forecast of $3.5bn. Total capex at $5.8bn is in line. <p>
<b>No changes to our valuation</b><p>
We will be making no changes to our valuation and recommendation for Premier Oil. At current levels, it is trading at a discount to our core NAV valuation of 407p per share (256p per share excluding Falklands) and total risked NAV of 457p per share. We maintain our BUY recommendation.
Merrion Stockbrokers Limited (registration no. 307878)
is a limited liability company whose registered office is at
Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.