The Premier Oil share price is up 75%. Here’s what I’d do now

first_img See all posts by Roland Head I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Image source: Getty Images Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. The Premier Oil share price is up 75%. Here’s what I’d do now I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Enter Your Email Address The Premier Oil (LSE: PMO) share price has been one of the top performers in the FTSE 250 over the last year. The stock is now up by around 75% from its 52-week low of 65p.Recent gains were triggered by news that the company will spend up to $871m acquiring oil and gas fields in North Sea.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…As my colleague Alan Oscroft explained recently, these deals might seem surprising for a company that already carries a lot of debt. In this article I want to take a closer look at this news and give my view on whether the shares deserve a buy rating.What’s happening?Premier will spend $625m acquiring the Andrew and Shearwater assets from BP. The company says that Andrew will add about 18,000 barrels of oil equivalent per day (boepd) to the group’s production, while Shearwater will provide a “significant producing and infrastructure hub”, plus 25m boe of reserves and resources.PMO will also spend up to $246m buying an additional stake in the Tolmount field from Dana Petroleum.These acquisitions will be funded by a $500m equity placing, plus the firm’s existing cash resources and — if needed — a $300m short-term loan.What’s notable is that is Premier isn’t planning to use any new long-term debt to fund this deal. Shareholders will pay, instead. In the meantime, the firm’s lenders will receive higher interest payments in return for extending their existing loans from 2021 to 2023.Does it all add up?In my view, the numbers look good on this deal, at least for the firm’s lenders. Premier says that the new assets should generate an extra $1bn of pre-tax free cash flow by the end of 2023. That’s equivalent to a gross return of 15% on the $871m it will cost to buy the fields, in just four years.Tax costs should be minimised because Premier already has $4.2bn of UK tax losses it’s trying to use up.Of course, the company will incur slightly higher finance costs as a result of these acquisitions. But they look affordable to me. Indeed, I believe that these acquisitions will help the firm to repay its existing debt more quickly.All in all, this deal looks good for Premier’s lenders. So are the shares a buy, too?Don’t forget decommissioningMany fields in the North Sea are nearing the end of their productive lives. This is one reason why big players such as BP are selling them.Premier’s new assets are a good example. From 2025 onward, the company expects to incur decommissioning costs of $600m on these fields. That’s a lot of money for a company that generated revenue of about $1,600m last year.These acquisitions will boost cash flow and help to repay debt over the next few years. But beyond that, I think decommissioning could start to be a drain on cash.Judging the fair value of PMO shares has become difficult, in my opinion. Although the stock looks reasonably priced on 12 times 2020 forecast earnings, remember there’s no dividend and lots of debt.You can buy BP shares on a similar valuation and gain a 6.4% yield and the safety of a much larger, more diverse business. I believe longer-term investors will probably do better with this FTSE 100 heavyweight.center_img Our 6 ‘Best Buys Now’ Shares Roland Head | Sunday, 19th January, 2020 | More on: HBR Simply click below to discover how you can take advantage of this. Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. “This Stock Could Be Like Buying Amazon in 1997”last_img read more