Analyst update after PMO post-results presentation

After yesterday's results, analyst Stephane Foucaud attended the post-results presentation by Premier Oil.

Here are some of his main take aways:

Sea Lion takes backstage, Tolmount looks much more interesting than envisaged

Main take aways:

• Overall, Premier is now looking beyond Solan, Capex and Opex keep falling and the firm could be FCF positive from 4Q16.
• The E.ON UK portfolio continues to prove better than expected (even than Premier expected). In particular Premier is providing much more detail on Tolmount that could become not only a new major hub but also the next engine for growth following the start-up of Catcher. Tolmount offers 30% IRR and is commercial at 30p/th. We are currently not carrying any value for it, which we will probably have to revise.
• Catcher is on track and as highlighted previously is likely to benefit from a reserves boost (that we already carry).
• Sea Lion, unsurprisingly, is moving to the back burner. Without a farm in partner, the project is probably too capex intensive for Premier.
• This is particularly true in the context of an upcoming debt refinancing with Premier's creditors, which is likely to give them far more influence on any large investment decisions made by Premier. Except an agreement by September/October 2016, fully papered by YE17.

Production

• 93% efficiency in 1H16 which compares very favourably with 84% in 2014.
• 2H16 production targeted at 80 mboe/d for an overall FY16 guidance of 68-73 mboe/d up from 65-70 mboe/d.
• Recent production of 95 mboe/d.
• The Company anticipates production growth of over 10 mbbl/d each year until 2018. This suggests over 90 mbbl/d in 2018. In 2017, the Company forecasts about 80-85 mboe/d production with only a very small contribution from Catcher (we carry 78.5 mboe/d and have assumed that catcher only starts production in 2018)
• UK is a key area of growth even beyond Catcher. Tolmount appears to be the next big project after Catcher.

Indonesia

• 97% production efficiency
• Premier's market share on GSA1 is growing (44% vs 43% in 1H15) and record sales on GSA2. Unprecedented level of demand in Singapore. There is still unfilled demand in Indonesia and Singapore. Opex per boe of US$9 vs budget of US$11/boe in FY16.
• New net development capex of US$100 mm could develop 170 bcf (Bison, Iguana, Gajah Puteri).

Vietnam

• 90% efficiency
• US$9/boe vs US$13/boe guidance
• Chim Sao continues to grow. At FID Chim Sao was a 50 mmbbl field. This is now a 80 mmbbl field.
• As a result of life extension, the FPSO terms are being revised. This will allow PMO to save US$7 mm per year over the next three years.
• In 2017, the Company will drill 2 infill wells that will allow the firm to maintain production flat (at 16.7 mboe/d production?). This will also add reserves (a few mmbbl?). The IRR of the project is 50%.

Solan

• 20-25 mbbl/d over the next few days.
• US$10/bbl opex over next 1-2 years.
• Solan is expected to become unmanned by next year. This will allow Premier to maintain opex low for longer.
• Latest delays at P2 have increased capex for the field by US$15-20 mm.
• Main lesson learnt on Solan: "take control of an asset from the start and do all the work yourself rather than relying on previous work from others".

Genelg (18.57% WI)

• 20 mboe/d production recommenced in May.

Catcher - on track, no fundamental changes but an increasing amount of granularity

• The field continues to look very good with the wells performing above expectations.
• Beyond the FX effect on the cost of the project (60% of capex is pound denominated), the wells have cost less. This is because one well in three were initially thought to require a side-track. In fact this has not been required in any of the wells.
• The last well was tested at 14 mbbl/d.
• Expect a reserves increase (we already carry this in our valuation). This will not happen in 2016 but rather in 2017 as Premier wants to drill more wells before feeling comfortable enough to review reserves.
• There has been no downtime due to weather during drilling.
• All the subsea equipment has now been installed.
• The FPSO is on track for sail away in Summer 2017 for first oil in 2H17. The contractor is two months late versus its Sail Away May 2017 schedule but Premier was assuming a later date.
• Premier is slowly releasing capex contingencies as the project progresses. Capex in 2017 for Catcher has been reduced since sanction from circa US$310 mm down to US$230 (not new).
• Opex at Catcher of US$20/bbl early life and US$30/bbl on the entire life of the field.

Tolmount - Becoming a key growth project for Premier

• We are not carrying any value for it yet in our NAV.
• Tolmount (PMO 50%) holds resources of 450 bcf. In addition, East Tolmount (same field as Tolmount but not appraised yet with no wells having been drilled) is estimated to hold 250 bcf. Further upside includes Tolmount Far East (volume uncertain) and the Artemis discovery (150 bcf PMO: 100%). Tolmount is much better than PMO anticipated and the resources figure will increase.
• FID could be taken late 2017. FID was initially expected to take place in June 2016; which Premier postponed. The development concept has been changed and cost reduced. Currently, PMO envisages less than US$600 mm capex with 200 mmcf/d plateau production and US$7/boe Opex (all gross figures). First gas could take place in 2020.
• The key near term focus is around capex certainty and commercial arrangement to take the gas onshore.
• Gas from Tolmount could be taken to Clitton or York (as subsea tie back) or directly to shore.
• Overall Premier sees Tolmount as a potential hub with a standalone facility where discoveries in the region could be tied-in to (Tolmount East, Artemis, Tolmount Far East).
• Tolmount development is commercial at 30p/therm.
• Premier indicated that it has become common for infrastructure providers to fund the infrastructure.
• Gas infrastructure to take and process the gas from a platform at Tolmount would represent 50% of the overall development capex.

Sea Lion

• Estimated Capex of US$1.5 bn
• The asset does not seem to be a key priority anymore.
• Farming Sea Lion down is required before taking to development.
• The licence has been extended to 2020. Do not expect any quick decision. US$45/bbl current estimated breakeven price.

Mexico Exploration

• First exploration well in 2017.
• Multiple 100-150 mmbbl prospects have been identified (salt flanks or sub-salt in water depths of less than 150 m).
• Premier is looking to exercise its option to increase its interest to 25% (versus 10% carried interest today).
• Cash cost breakeven in 2016 down to US$25/boe. This includes interest, G&A and tax.

Financials

• US$730 mm Capex for FY16 (unchanged) includes US$30 mm for E.ON UK. This could go down a bit on US$/£ exchange rate.
• 2H16 Post Tax pre interest CF guidance of US$300 mm (for a total of about US$400 mm for FY16).
• The US$/£ movement has allowed PMO to post a reduction in decommissioning estimates of US$100 mm.
• Premier also posted a gain on the E.ON UK acquisition of US$85 mm (on the Forward Curve). This excludes any tax synergies and is based on prudent decommissioning assumptions. A very small value was given for Tolmount. This re-enforces our early view that the deal with E.ON was very value accretive for Premier.
• In 2016, Premier is US$40 mm under budget for Opex because of FX effects. The Company is likely to be at the low end of the US$15-17/boe opex guidance for FY16.
• Opportunities for further cost reductions are much less.
• Capex is guided at about US$400 mm for 2017 and slightly below US$400 mm for 2018. FY17 Capex could be lower if US$/£ FX rate does not change. This includes exploration and probably reflects the focus on reducing debt. In addition, the Company's creditors will have to approve any new large development.
• Net Debt is expected to peak at US$2.9 bn in 3Q16 (up from US$2.6 bn at the end of 2Q).
• The target is to reduce Net Debt so that Net Debt/EBITDA would be below 3x in 2018 on the forward curve (5.2x at the end of June).
• Premier expects to be FCF positive from 4Q16 at U$45/bbl.

Debt Refinancing

• Premier now expects to reach an agreement by the end of September/early October. The deal would be fully documented by YE16.
• 50 creditors to negotiate with.
• Key parameters for the new debt package deal include security, cost of debt but also the desire of Premier to maintain US$800 mm cash and undrawn facilities that would remain fully accessible.

Others

• The focus continues to be on reducing debt. This is probably one of the reasons why Tolmount has been given priority over Sea Lion (our view). This is a good thing.
• The core areas of Premier consist of the UK, Indonesia and Asia. The rest is a candidate for divestment. It is now unlikely that Premier would sell WI in Catcher or Solan because the market for assets is depressed. It is very difficult to get full value for any asset.
• Bagpuss: Premier will NOT dedicate more capital to heavy oil in the North Sea in the current environment. This project is moving to the backburner. Premier was also hoping for more mobile oil.