JP Morgan warns of risks in Premier Oil

If you are looking for a way to 'play' a possible bounce in stock prices should oil rebound - so-called oil price Beta - Tullow Oil is a better choice than Premier Oil, JP Morgan said.

Premier Oil is a full-cycle exploration outfit with a diverse set of assets, the broker noted, initiating its coverage with a 'neutral' recommendation and 78p target price.

However, debt-financed increases in production had left its equity shareholders "exposed" to the weakness in the oil price.

The company had sufficient liquidity to operate but it needed an oil price above $50 in order to avoid having to go cap in hand to shareholders, the broker said.

Its financial position was "precarious" and management's number one priority was deleveraging its balance sheet.

"Solan is closing in on first oil and plateau production will start the deleveraging process, but not if oil stays below $50/bbl."

"Premier’s proven ability to survive (this company has seen it all), its supportive shareholder base and banking syndicate should not be underestimated, but we do not see as much flexibility as in cycles past, we prefer Tullow to play oil price beta and M&A risk and hence initiate with a Neutral," analyst James Thompson said in a research note sent to clients.