Premier Oil continues to consolidate

This morning, Premier announced the signature of a share purchase agreement with Al-Haj Energy Limited for the sale of Premier Oil Pakistan Holdings (Premier’s Pakistan business) for a cash consideration of $65.6m. Proceeds from the sale are, understandably, to be used to reduce corporate debt. The sale of Pakistan follows the divestment of Block A Aceh ($40m) in January 2015 and Premier Norge AS ($120m) in November 2015 as Premier consolidates its geographical foot-print and focusses on core areas including the UKCS and SE Asia.

Headline deal value compares well at $65.6m compared to consensus NAV for Pakistan of $56m, however, this is likely to partly due to the onerous discount rate E&P analysts apply to geographies such as Pakistan – consensus discount rates range from 12% to 15%. It also not known to what extent analysts had incorporated recent success from the Zamzama well intervention programme which was significantly ahead of management expectations. Nevertheless, the deal could represent a win / win for Premier and Al-Haj Energy given their contrasting business models and priorities.

With regard to deal value, there are few deal comps available due to the lack of Pakistan E&P M&A activity and disclosure. BHP, for example sold its stake in the Zamazama gas field to the Hashoo Group at the start of 2016 for an undisclosed sum. BP’s sale of 35kboed of Pakistan based production (c 30 % oil) in 2010 was priced at $775m or $9.3/2P bbl compared to Premier Oil Pakistan at c $5/boe, but timing, commodity prices and phase mix make these poor comparatives.

Premier initiated a formal sale process for Pakistan in July 2010 following the receipt of an offer for the business, and after a deadline expired with the company’s preferred bidder the sales process was re-opened in November 2016. Arguably, Premier’s need for cash has increased over this period due to leverage concerns and Solan cost overruns. $65.6m of cash is unlikely to make a sizeable dent in Premier’s net debt of $2.76bn net debt (accounting for just 2%) but could get the company closer to a target net debt / EBITDA of sub 3x by the end of 2018 and is part of the group’s broader asset rationalization agenda. In addition, we would expect Premier to benefit from a small (small as largely non-operated) reduction in G&A on the non-core asset base. On the flip-side, Premier will lose one of its lowest opex cost (management estimated just $4/boe 2017) and highest gross margin assets (in percentage rather than absolute terms).

For Al-Haj Energy, we expect the fact the company can justify a NAV premium given a possibly lower cost of capital (than the discount rate used by UK E&P analysts for Pakistan), and the impact of up-coming in-fill drilling programmes. Al-Haj, being an indigenous E&P, may also have the ability to leverage government relationships for license extensions.

As of December 2016, Premier’s Pakistan business accounted for 47.4 mmscfd (7.5kboed) of production from six non-operated gas fields. Premier reports 2P reserves for the geography combined with Mauritania at 0.3mmbbls liquids and 79.9bcf gas. The non-operated assets sold include Qadirpur (4.75%), Bhit and Badhra (6%), Kadanwari (15.79%), Zamzama (9.375%), Zarghun South (3.75%).