Premier Oil raises guidance as production ramps

Premier Oil (LSE:PMO) reported H1 2016 Results this morning with a raised production guidance for the full year and encouraging momentum in production rates. It also reported a big reduction in cash generation YoY and updated the market on progress with its lending group.

Production guidance increased to 68-73 kboed. The average achieved so far in 2016 is 61kboed but with Solan finally ramping up after much delays and the EON acquisition bedded in, recent production has been as high as 95kboed. This bodes well for momentum and hence the increase in full year guidance.

There is a big drop in Operating Cash Flow in H1 2016 with Premier achieving $109m (down from $513m in H1 2015). The main driver of this seems to be hedging and oil prices, where the average selling price of $48.6/bbl in H1 2016 is nearly half the $83.7/bbl realised in H1 2015.

Premier's only major investment commitment now is the Catcher development which it confirms is on track for 2017 first oil. It has managed to reduce project capex for Catcher by 20% since sanction, following the huge slump in rig day rates and other oilfield service costs over the last couple years.

Premier confirms progress is being made with the lending group towards an amendment of covenants and debt maturities:

"Good progress is being made ... Premier expects negotiations to conclude and revised agreements to be implemented during H2 2016."

However Premier confirms that should negotiations break down with the lending group, the creditors reserve the right of repayment, which could lead to Premier no longer being a going concern:

"The risk that the Group will be unable to defer the testing of the current financial covenants ... may cast significant doubt upon the Company's ability to continue to apply the going concern basis of accounting." 

Commenting on the announcement, VSA Capital said:

"With low operating costs and the favourable tax position in the UK from the E.ON assets the Solan field produces important cash flow for PMO to reduce its debt. These results should be well received by the market but PMO’s financial position still lies in the balance. It needs to deleverage and requires an oil price of cUS$50/bbl to do this but we are cautiously optimistic." 

The shares reacted positively at first, jumping over 3% but have since pared those gains. Premier is up over 315% since the low of mid-January 2016 when Brent hit its lows.

Mike Welton, Premier Oil Chairman, commented:

"We now look forward to a rising production profile delivered from a leaner operating cost base and with significantly lower committed capital expenditure.  The second half of the year will see Premier transition from a period of heavy investment to one where at oil prices above $45/bbl we can generate free cash flow.  Our priority for that cash flow is to deleverage our balance sheet while continuing to ensure the integrity of our assets and to deliver our Catcher project.  We will invest in new development projects within a strict disciplined framework such that we are in a position to execute those projects which deliver the highest value for our stakeholders."