Today 12th July 2017, Premier Oil shares (PMO), jumped 35% despite the volatile crude oil situation and investors temporarily forgotten about the high debt situation and low productivity on the current portfolio. Firstly this is great for believers whom have invested in PMO when crude oil was below $35 in late 2016. However I would like to educate new potential investor with real facts before diving into the decision of investing in this hard working underdog company.
Investors needs to calculate the risk by the following few facts.
1.Accuracy of the Seismic data
This discovery is base on theoretical 3D-seismic data conducted followed by drilling activities indicated by the geo-technics specialist. According to ta reputable paper, there was no clear indications the amount of time and money spent on these seismic data against the drilling accuracy. So how close was the theoretical data against the actual data? In discussion with a reputable geo-technic specialist, the top 4 major oil exploration utilises different technic to determine the accuracy of these findings. According to this reputable specialist he claims the chance of accuracy of this data would be 33% at this stage. I strongly do not believe Talos, Sierra or PMO have the same team of analyst in comparison to Shell, BP or Total SA.
2. First drop of Oil
The next stage would be business development, FEED, Detail Design, Procurement, Construction, Commissioning and Operations. This cycle would take an approximately a minimum of 6 years from the current stage for a major oil operator whom have the cash or credit power to recruit cash. For the next 6 years at minimum there would be a consistent money cash outflow to sustain these activity. Based on current market cost, a $2.5BN would be required to be poured at least for these activity in the Gulf of Mexico. Which means the earliest first oil is 2023. It would be at least 2025 before they break-even into profit region.
3. Premier Oil minority stakes
Premier Oil are on the headlines but the actual fact is that they only own 25% of these stakes and are class as minority stake holders. If for the next three years the debt profile are looming, they may have to sell their stake away. If the Oil is $100 per barrel by 2023, operating cost estimated at $20, equals to a profit of 80. At 25% stake Premier is only taking home $20 barrel. If oil was $60, then the profit would drop to $10.
4. Experience in major project scopes.
Neither of the three shareholders have the depth and experience team force currently. They will require to draft the best project team at a price to battle the ‘Hyenas’. The ‘Hyenas’ are the supplier, design and engineering team, vessel suppliers, fabrication team etc. When these Hyenas knows about the potential high profile wells, they will start charging an arm and leg for their services and goods. Its like walking into an Egyptian flee market all dress in Louise Vutton clothing and don’t expect to find a bargain.
5. Long term investment with a strong heart.
If you are an investor looking for multiple folds growth with no dividends in PMO, please ensure you are investing money you can afford to potentially lose. These funds must be sitting for at least 5 years before you let go. Do not expect dividend payout from PMO then. Never check the shares every other day hoping for another breaking news to expect another 30-50% increment.
Do keep a watch out on which ‘Hyenas’, might win contracts for this development and projects. Once the contract is awarded the first phase money should be received in under 6 months meaning cash flow from these scavengers. Woodgroup Amec, Petrofac, FMC, Korean/Chinese fabrication yards, valve suppliers would be a better investments as they make their money based on man hours and 150% marked up procurement goods and services.
In my final statement; Oil is under $48 today. There have been no projects happening by the major players for at least 2 years. Projects are picking up in 2018 (hopefully). Fast forward 6 years before there would be any major real operating platforms until 2023-2025. Between these 6 years the supply would drop and demand of oil would start to increase. Perhaps we would potentially see oil above $80 (stable, steady, realistic, sustainable) between 2019 to 2021.