Premier Oil mulls reduction in capex program amid oil price volatility

In light of the current market volatility, the UK oil and gas company, Premier Oil, is looking into its ability to reduce the capex program for 2020 with the possibility to save at least $100 million.

In an update on Friday, Premier said that its assets continued to perform well with production to the end of February of 76.6 kboepd.

Full-year production guidance of 70-75 kboepd is reiterated, before the impact of the proposed UK acquisitions.

Premier has hedged c. 30 percent of its full-year 2020 oil and gas entitlement production at an average oil equivalent price of $60/bbl. This includes 40 percent of the group’s oil production for the first half of the year hedged at $64/bbl.

The group has unrestricted cash of $135m and undrawn facilities of c.$330m, as at the end of February. Premier’s 2020 cash flow breakeven price is under $50/bbl and a $5/bbl move in the oil price point forward is expected to result in a c.$50m move in free cash flow on a full-year basis.

This includes the benefits of the hedging program and is based on capex guidance of $470m and new operating cost (including leases) guidance of c. $20/boe. As well as maintaining liquidity, Premier is focused on managing its forward covenant position which could be impacted by ongoing oil price weakness.

According to Premier, discussions are already underway regarding the group’s ability to reduce its 2020 capex program. Initial analysis suggests that at least $100m of savings and deferrals is achievable with potential for further reductions.

Assuming a $100m reduction in planned 2020 capex and $35/bbl oil price for the remainder of the year, the group would expect to be broadly cash flow neutral in 2020. This does not take into account positive cash flows from the proposed UK acquisitions or potential disposal proceeds.

With regards to the Premier’s proposed acquisitions and extension to the group’s credit facilities, the court hearing to sanction the creditor schemes of arrangement is scheduled to start on March 17. Premier said it would provide an update on the next steps in the process once the sanction hearing has taken place.

Other oil and gas companies have also already announced its plans to reduce spending in 2020 due to the volatility in the oil market exacerbated by the oil price war and the outbreak of the coronavirus, including Apache Corporation, Murphy Oil, and Noble Energy.

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