Premier Oil upside hinges on de-risking assets, confirming reserve upside, Barclays says

Analysts at Barclays downgraded their recommendation on shares of Premier Oil, telling clients that the stock's potential now rests on management's ability to de-risk the company's pre-development assets and to confirm the upside for the company's reserves.

Yes, first oil from the Catcher field heralds the end of a phase of heavy capital expenditures, they said.

Yes, increased cash generation would reduce debt.

But, all of the expected cash flows would be absorbed by its debt and decommisioning provisions.

"Our valuation analysis underlines the reality that future cash flow from Premier’s ~180mmboe of developed 2P reserves and 75-80,000b/d of net production is wholly offset by its debt and decommissioning provisions. As such, the equity outlook is set to be determined by management’s success in de-risking pre-development assets and confirming reserve upside," they said.

Furthermore, the shares - one of the most heavily short-sold in the market - were already up to speed with their 69p a share estimate for Premier's tangible net asset value.

Yet in itself that implied a price for Brent crude oil futures at or above $60 in the medium-term, in comparison to a peer group average of $53, they said.

Hence, they downgraded their recommendation from 'equal weight' to 'underweight' and trimmed their target price from 72p per share to 70p.

"Upside to our valuation can come from increased visibility on Catcher reserve growth; meanwhile clarity on funding solutions for Sea Lion and Zama that could transform the valuation remains further out, in our view."