Premier Oil production in line as it announces North Sea acquisitions

Premier Oil updated the market on its trading ahead of its full-year results on Tuesday, reporting 2019 production of 78,400 barrels of oil equivalent per day, which was at the upper end of its full-year guidance.

The FTSE 250 company said that was underpinned by high operating efficiency and continued high rates from the Premier-operated Catcher Area.

In a separate announcement, the firm also announced “accretive and strategic” UK North Sea acquisitions, underwritten financing and a proposed extension of its credit facilities.

Looking at its full-year highlights, at BIG-P in Indonesia the company delivered first gas on schedule and below budget, supporting higher Singapore offtake in the fourth quarter.

At Tolmount in the UK Premier said it was on budget and on track for first gas by 2020 year-end, adding between 20,000 and 25,000 barrels of oil equivalent per day net at its 50% interest.

Planning of the Tolmount East development was said to be underway, ahead of a targeted sanction in the second half of 2020.

At Sea Lionin the Falkland Islands, heads of terms were signed with Navitas Petroleum to farm in for a 30% interest in the project, with the board saying discussions were progressing with senior lenders regarding project financing.

Over at the Tuna Production Sharing Contract (PSC) in Indonesia, heads of terms were also signed, this time for a full carry on a two-well appraisal campaign.

At Zama in Mexico, Premier Oil said its unitisation process had progressed with the formal notice confirming a shared reservoir submitted to the regulators in December, and the sales process ongoing following a successful appraisal campaign.

The company said its exploration portfolio was “materially enhanced” during the year with the capture of new acreage in the Andaman Sea in Indonesia, and on the Alaska North Slope.

It noted its pipeline of near-term high value exploration and appraisal wells, including the Malguk-1 appraisal well in Alaska, and Berimbau/Maraca in Brazil.

Estimated total capital expenditure for 2019 stood at $300m (£228.25m), with operating expenditure excluding lease costs standing at $11 per barrel of oil equivalent, which were both below original guidance.

The company’s net debt shrank by more than $330m during the year, from $2.33bn to $1.99bn, which was in line with guidance.

“Premier's strong operational performance in 2019 has generated significant free cash flow for the group enabling us to materially reduce our debt levels and to invest selectively in our portfolio for future growth,” said chief executive Tony Durrant.

“The Tolmount development is making good progress and will provide a step up in group production once on-stream at the end of this year.

“We also look forward to drilling our first well in Alaska, a potentially transformational well for Premier.”

Looking at its proposed acquisitions, Premier Oil said they consisted of the Andrew Area and Shearwater assets from BP for $625m, and an additional 25% interest in the Premier-operated Tolmount Area from Dana for $191m, plus contingent payments of up to $55m.

At the same time, the firm announced the proposed extension of its existing credit facilities to 30 November 2023.

It said the acquisitions would add around 23,000 barrels of oil equivalent per day of cash generative production in 2019 with development upside, with the acquired assets forecast to generate more than $1bn of free cash flow to the end of 2023.

They would also add 82 million barrels of oil equivalent of reserves and contingent resources at an implied cost of less than $10 per barrel of oil equivalent, and would contribute to rising Group production out to 2024, with pro forma 2019 production in excess of 100,000 barrels of oil equivalent per day.

The board said the moves would add low cost, low carbon emission assets with combined operational expenditure of less than $20 per barrel of oil equivalent, and would accelerate the use of its $4.2bn tax losses.

Financially, the board said the acquisitions would “materially strengthen” Premier's financial position, with the additional free cash flow set to accelerate its debt reduction, and “significantly reduce” its forward covenant leverage ratio towards 1x by 2022.

Premier Oil said that at the Andrew Area, consisting of interests of between 50% and 100% in five fields and the operatorship, the assets were currently producing around 18,000 barrels of oil equivalent per day net to BP, with a material near-term upside through the further development of the Andrew Lower Cretaceous reservoir.

At Shearwater, with a 27.5% interest, the company described the asset as a “significant” producing and infrastructure hub, which would add 25 million barrels of oil equivalent of reserves and resources, with incremental investment opportunities and tariff income.

For Tolmount, where it was acquiring a 25% interest, the board said the move would consolidate its interest in an existing high return development, which was on schedule to deliver first gas by the end of 2020, with “significant” upside following recent drilling success at Tolmount East.

The board said the proposed acquisitions would be funded by a $500m equity raise, net of expenses, which had been fully underwritten on a standby basis, as well as existing cash resources and, if required, an acquisition bridge facility of $300m.

Premier said it expected that the equity raise would include both a placing and rights issue component, with any shares issued under the placing qualifying for the subsequent pre-emptive rights issue.

It was planning to confirm the structure and terms in the first quarter, following consultation with major shareholders.

Lender consent for the proposed acquisitions, related funding arrangements and the extension of its credit facilities would be sought via two court-approved schemes of arrangement.

Of the creditors subject to the schemes, 83.3% of super senior commitments and 72.7% of the senior commitments had already committed to approve them, the board said.

The acquisitions had an effective date of 1 January 2019, with completion of all three expected to occur by the end of the third quarter of 2020.

“These acquisitions are materially value accretive for Premier and are in line with our stated strategy of acquiring cash generative assets in the UK North Sea,” said Tony Durrant.

“We look forward to realising the significant long-term potential of the Andrew and Shearwater assets through production optimisation, incremental developments and field life extension projects.”

Durrant said the company was also “pleased” to have consolidated its interest in the high-return Tolmount development, where it saw material upside.

“The cash flow generated from the acquired assets will also accelerate the deleveraging of Premier's balance sheet.”