July 12, 2012 (Investorideas.com Newswire) FoxDavies Research issues Initiation of Coverage of Premier Oil (PMO.LN) with at Target Price: £4.85, BUY. While the operational update is supportive, of which we will discuss later, the real news today is the farm-in to Rockhopper’s Sea Lion appraised discovery, doubling its reserves. While there will be questions over PMO’s ability to fund its obligations, we believe that this is a good move for the Company as it was beginning to run out of projects that would “move the needle.” With an upside of 37% attributable to the sanction of Sea Lion alone, we initiate with a BUY Recommendation and 485p Target Price.
Current Price: £3.58
Target Price: £4.85
Market Cap (M): £1893
Shares in Issue (M): 529
The Core Will Grow Through the Drill Bit: Drill bit inventory appears modest with 16 exploration and appraisal wells planned for the next 12 months targeting an un-risked net prospective resource potential, on a P50 basis, of ~200 mmboe. On the development aspect, scheduled commencement of production from Solan project ( UK ), Dua project ( Vietnam ) and Pelikan and Naga projects, Anoa Phase 4 project ( Indonesia ) in 2014, keeps upwards production trajectory intact.
On Track to Enter 100m boepd Club: The Company continues to demonstrate excellent growth. 2Q’12 production stood at average 61m bopd (+5.6% q-o-q) with 2012 exit rate forecasted at 75m boepd, which imply growth of 33.9% (y-o-y), impressive by any yardstick. We are comfortable with the Company’s forecast given growing output from Balmoral area fields (UK), Gajah Baru (Indonesia) and Kadanwari (Pakistan) and commencement of production from Huntington and Rochelle fields (UK) by the end of 2012.
Buyouts and new licences to propel next phase growth: While the operational update is supportive, the real news today is the ~$6/bbl farm-in to Rockhopper's Sea Lion discovery. In what looks like a fair deal to all parties, Premier (the Company) looks set to almost double its reserves base once it begins production from Sea Lion. Given that the Company doesn’t have the billions available to it that a larger player has, this is an indication of the intent behind the investment. However, we believe that, between financing available from third parties and internal resources, PMO is well positioned to fund Sea Lion’s development. Furthermore, we estimate that Sea Lion will be online in 2017, but should it be sooner, it has a significant impact on valuation; we estimate $400mm (gross) for each year is comes on stream early.
Breaking Through the Glass Ceiling?: Premier is starting to bulk up and starting to fulfill the potential of its asset base and management team, all of which could be the catalyst required to see it break through the glass ceiling that a lot of E&P companies face when they mature - critical mass, which is what Tullow Oil has managed.
Premier a Better Vehicle to Play the Falklands?: Now that PMO is a Falklands player (assuming the deal is agreed), then it poses the question as to whether it might be a better vehicle to play the Falklands basins. The size of the prospects in the Falklands is world class, and even a 60% interest would generate significant value. The scope for explosive upside is limited due to the fact that any exposure to the Falklands assets will be diluted by the other assets in its portfolio.
Reiterate BUY, 485p Price Target: We think with a diverse portfolio outside of the Falklands and operational cash flow, it has a strong position in a region where size of the prize is significant. We initiate coverage with a BUY recommendation and a 485p Target Price.
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