Premier Oil hit by Jefferies downgrade

Premier Oil’s shares tumbled on Tuesday after Jefferies cut its rating on the stock to ‘hold’ from ‘buy’ and slashed the target price to 33p from 120p.

Jefferies said net debt is expected to rise to $2.65bn in full year 2016 and existing production assets are set to decline in 2017 amid a slump in oil prices. The brokerage said the company has “similar debt issues” to Tullow Oil so the full value for the Sea Lion project in the Falklands upside is “questionable”.

“The near-term outlook for the oil market is bleak as global over-supply continues,” said Jefferies analyst Mark Wilson.

“Balance sheet support for the Euro exploration and production (E&P) sector is the immediate concern combined with materiality of asset base in a new world order where production supply concerns are clearly reduced.”

Wilson said production growth has been a challenge for European E&Ps in recent years even at high oil prices yet the recent pick-up in output is the principal reason for the current weakness in prices.

“In the cycle to come, this historical operational reality will likely weigh on Euro E&P's, probably in the form of tighter access to capital (capital to flow where production can grow),” he said.

“E&P's with truly material commercial assets, a realistic view on monetisation & balance sheet strength have a place in such a world, but patience is required.”

Shares in Premier fell 7.02% to 26.50p at 1052 GMT.