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Exploration to put Premier in big league

The Times: Exploration to put Premier in big league

“Shell lag behind a red-hot sector”: “partly because Shell “sexed up” its oil reserves and was knocked off its pedestal”

Stella Shamoon backs oil company’s bold strategy
14 August 04

SHARES in big oil companies have been sold in recent weeks even as the price of crude oil soars to record levels. BP and, notably, Shell lag behind a red-hot sector enjoying its best ever industry environment.

That is partly because Shell “sexed up” its oil reserves and was knocked off its pedestal and BP suffered collateral damage. But it is also because market sentiment is skittish, fearing that the price of oil will soon boil over and scald oil company shareholders.

But Premier Oil, an independent oil and gas enterprise with a strong exploration portfolio in the UK, South and South-East Asia and West Africa, is poised for an upgrade later this year. It is expected to report positive results from drilling 14 exploration and appraisal wells, up to nine of which are off the coast of Mauritania in West Africa.

That prospect, in which Premier owns a 9.2 per cent stake, could yield a rich bonanza for the company and its partners: Australia’s Woodside Petroleum and Hardman Resources, with 54 per cent and 21.5 per cent respectively; BG Group, with 11.5 per cent; and Roc Oil, with 3.7 per cent. It is early days, but results have been encouraging so far.

Premier, capitalised at nearly £500 million, was restructured in September 2002, when its two major shareholders, the oil companies Amerada Hess and Petronas, cancelled their combined 50 per cent shareholding and injected £234 million in cash and debt repayment into the company in return for its entire interest in its Burma business.

The new Premier boasts a beautiful balance street with no debt, strong cashflow and a bold strategy to increase its exploration exposure beyond existing production assets onshore in the UK and in the North Sea. It has taken on acreage in West Africa to complement its prospects in Asia.

In the words of its chief executive, Charles Jamieson, Premier is “firmly back in the exploration business”.

Premier is adroit at identifying and acquiring acreage, and in farming into other companies’ blocks in a deliberate strategy to share risk. Mr Jamieson says: “You can get lucky when going it alone. But we prefer to share risks. We have an annual budget of between £25 million and £30 million for exploration, which we can afford from cashflow.”

The company depends on gas for two thirds of its business and on oil for the remainder. Its long-term gas contracts in Indonesia and Pakistan give Premier financial strength and resilience.

Results last year put Premier in a league of fast-growth entrepreneurial enterprises. Net profits rose from £22.6 million in 2002 to

£40.8 million. Net cashflow of £255.2 million included £150.6 million from the corporate restructuring and compared with £93.2 million the previous year. Net cash at December 31 stood at £7.1 million — quite a turnaround given net debt of £249.5 million the previous year.

But the first half of this year has got off to a slow start. Exploration activities have been disappointing. Premier has drilled three wells, but those in Crollo, in the North Sea, and Ghumg, in Pakistan, were dry, while the well in Guinea Bissau proved inconclusive.

Premier has certainly not written off Guinea Bissau. “We plan to go back and drill two or three wells next year, assuming our partner, Occidental, agrees,” Mr Jamieson says. “The market was disappointed, but the results so far are not disappointing at all. Obviously, one likes a bonanza first time round, but we have proved that the play works.”

The market wants proof of Premier’s consistency in drilling success before it assigns fair value to its entrepreneurial deal-making and promising exploration portfolio. Its shares have been held back so far this year but positive news from Mauritania should put Premier in a sweet spot. Buy Premier’s shares at 598p.

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