Premier Oil's Refinancing : a Short-Term Solution?
An oil rig in the North Sea, Source: Bloomberg
British energy producer Premier Oil have faced a multitude of issues in recent years, from the oil price crash in 2014 that left an enormous debt pile to the current COVID-19 induced recession that has driven the energy market to record low price levels. The legacy of the 2014 crisis has plagued Premier Oil since and they have been forced to restructure their debts twice, firstly in 2017 and for the second time earlier this month. The second restructuring comes at a crucial time for the group who are also in the process of acquiring further oilfields in the North Sea and amidst a growing market sentiment that oil may not have a long-term future with the rise of alternative, cleaner energy sources.
On August 20th Premier Oil released their earnings reports for the first half of 2020 as well as confirming the details of the refinancing of their debts. The figures mirror trends seen across the industry and paint a bleak picture of the year so far for Premier Oil. The company saw a heavy loss of $672m after tax, way down on the $121m seen across the same period in 2019. The losses came with a marked fall in revenue down to $530.6m having been at $883.1m, caused by both a fall in production from 84,100 barrels of oil equivalent per day (boepd) to 67,300 and the collapse in oil prices experienced, with Brent Crude hitting a low of $20 a barrel in April having been at $70 a barrel in January. A further result of these price crashes was a significant write down of assets which totalled over $600m for the period. On the publication of this data share prices dropped 25%.
Alongside the earnings report was the announcement that Premier Oil had successfully refinanced their debts. The firm were able to refinance their $2.9bn debt pile under more favourable terms than expected with the maturity of all the debt extended from May 2021 to March 2025 at a slightly increased interest rate of 8.34%. They were also able to lift some of the restrictions of the 2017 refinancing which previously meant the group had to be granted permission from its creditors before they enacted new investment projects. Under the new deal Premier Oil now have greater operational flexibility but this has come at the financial cost of increased rates. Whilst the rise in rates was only by 1.4% it means interest payments alone may make up $165m a year. However, the refinancing overall is a favourable one for Premier Oil and ensures the firm’s near-term survival. CEO Tony Durrant claimed the restructuring would eliminate the “balance sheet overhang that Premier has suffered with for he last few years” as he praised the deal.
CEO Tony Durrant. Source: The Telegraph Premier Oil also announced an intention to raise $530m from shareholders, with $205m of this underwritten by creditors who will convert debt to equity. It is said $300m will go towards eroding the debt pile and the remainder set to be put towards their acquisition of BP assets in the North Sea. The deal, which was successfully renegotiated in June will give Premier Oil offshore oil fields in the Andrew area off the north-east of Scotland and a stake in the Shearwater gas field in the same area.
Following the turmoil in the markets caused by the pandemic Premier sought a renegotiation of the deal which was initially agreed at $625m in January and will now pay $210m upfront and a further $115m should oil prices move above $55 per barrel. As well as enabling a substantial cost saving the renegotiation also ended a damaging legal dispute with Hong Kong based hedge fund Asia Research Capital Management (ARCM), a major creditor to the firm. ARCM wanted Premier to abandon its acquisitions and focus purely on cash flow, criticising the previous deal which had an incredibly optimistic assumption of prices of $70 a barrel. The dispute had led to ARCM building one of the largest short positions in UK history against Premier Oil, worth a staggering 16.7% of Premier’s stock. ARCM have since agreed to reduce the position and will receive 82.2m shares at a price of 26.69p each, raising $27.5m for Premier Oil. With the acquisition of these fields and expansion of current positions Durrant claims Premier will increase production by 40,000 boepd over the next 12 months to exceed production levels of 100,000 boepd. Estimates suggest that Premier Oil is able to break even at prices of just $37 a barrel, which is far lower than some of its British-based competitors. With current Brent Crude prices hovering around the $45 a barrel mark Premier look set to be earning money again soon and there are expectations that the firm will quickly return to profitability. Whilst Premier Oil look secure in the near-term the long-term viability of the firm remains in question. As warnings on the effects of climate change have increased pressure on firms to be more environmentally responsible has also risen. Financial institutions in particular have come under scrutiny for their investing and lending practices and as a result many are adopting more stringent ESG measures. This has reduced capital availability for fossil fuel firms such as Premier Oil as lenders and banks become less willing to finance them. As a result, many oil & gas firms, particularly smaller groups like Premier Oil are experiencing more difficulty in obtaining finance and seeing the cost of borrowing rising. As the production of clean energy becomes more viable and ESG pressure continues to tighten it is likely financing for firms in the sector will continue to become harder to access.
The long-term outlook for oil prices is also a concerning one for producers with supply gluts and reduced global demand looking likely to persist in years to come. Therefore, whilst this refinancing ensures Premier Oil’s survival for now they will need to adapt to counter the longer-term threats to the industry.