Premier Oil - Trading Update; Operating Efficiency at Catcher Lower but Improving

Bottom Line:

The headline is a reduction to production guidance although deliverability at Catcher looks strong and the development/appraisal pipeline is progressing. We remain neutral as we believe it is challenging for Premier to outperform with a weakening commodity price although at our Brent forecast of $70/bbl LT the shares look good value.

Key Points

  • Production Guided Lower. YTD production is 78.4 kboepd with full year guidance now expected to come in at ~80 kboepd (BMO 82.5 kboepd) from 80-85 kboepd. Opex guidance of $17-18/boe (BMO $17.9/boe) remains unchanged although capex guidance has reduced to $365 million (from $380 million), due to phasing of appraisal and abandonment expenditure.
  • Deleveraging the Balance Sheet. Net debt has reduced to ~$2.5 billion as at end October and is expected to be ~$2.4 billion at the year end (BMO/consensus ~$2.3 billion). Covenant leverage ratio is expected to drop to 3.0x by YE18.
  • Downtime at Catcher. Lower-than-expected operating efficiency has impacted Catcher, which has produced at 26.5 kbopd since June (H2 2018 BMO 29 kbopd). Operating efficiency improved over the last month, however, with an average rate of around 65 kbopd (gross). Rates in excess of 70 kbopd are frequently achieved and Premier expects to reach agreement with the FPSO provider to increase the contractual oil production rate from 60 kbopd (gross) to 66 kbopd (gross) shortly.
  • Development and Appraisal Update. The pre-unitisation agreement at Zama (29p/sh unrisked) has been approved. The first appraisal well (end November) will test the oil water contact in the north and will be deepened to test the Marte prospect and also side tracked, and flow tested. A second appraisal well will evaluate the south. Pemex should spud the Asab-1 well in Q1 2019 to test the extension of the Zama structure onto their block. The Tolmount East appraisal should spud in mid-2019.
  • Valuation and View. The shares are trading at a 43% discount to our NAV. Remain Market Perform as Premier is likely to be more impacted by a volatile commodity backdrop although at our long-run Brent forecast of $70/bbl, the shares look good value.

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