ARCM Question List #6 - Did Premier Oil Already Book a $267 Million Gain (equivalent to 24% of book value) From the Proposed Acquisitions

LONDON, March 16, 2020 /PRNewswire/ -- As per ARCM's previous statements, we believe Premier Oil should focus on its cash flow position and abandon its proposed acquisitions which were negotiated in the autumn of 2019 using forward prices of around $70 for Brent and 50p/therm for UK gas (available here). As stated by the Company, these acquisitions will require a capital raise of $500 million - being multiple times the Company's current market capitalization. 

As other stakeholders and media raise questions regarding the financial appropriateness and likelihood of the proposed acquisitions closing, we were very surprised to see that the Company has recognized a $267 million deferred tax asset in relation to the proposed acquisitions in its 2019 results. Especially as such a tax asset will only exist if the proposed acquisitions are actually completed – which we believe is increasingly unlikely. The following disclosure can be found in the notes section of the 2019 financial statements (available here) disclosed on 5 March 2020 under 5. Deferred tax:

"The corporate model used to assess whether it is appropriate to recognise the Group's deferred tax losses and allowances was re-run, using an oil price assumption of US$65/bbl in 2020 and 2021, US$70/bbl in 2022 and US$70/bbl in 'real' terms thereafter. These price assumptions are consistent with that used when assessing the Group's underlying assets for impairment. The cash flows included in the corporate model are predominantly derived from future revenue from existing UKCS assets. The existing UKCS assets include both existing producing assets and certain future currently unsanctioned assets. The cash flows also include future revenue from the proposed acquisition assets announced on 7 January 2020 on the basis that, at the balance sheet date, management consider it probable that the acquisitions will complete and that the cash flows will arise within Premier's UK ring-fence. The acquisitions represent approximately US$267 million of the deferred tax assets recognised at 31 December 2019."

$267 million of deferred tax assets represents approximately 24% of the Company's shareholders' equity as of 31 December 2019^[1]. Given the significance of this accounting adjustment, we call on the Company to provide responses and disclosures to the following questions:

1. Would the $267 million of deferred tax assets be fully or partially reversed if any or all of the proposed transactions do not go ahead due to i) the scheme not being sanctioned by the Court; ii) shareholders potentially not supporting these acquisitions; or iii) the Company's potential inability to raise the required equity capital as its current market capitalization is far below the minimum equity raise required to complete the acquisitions? 
2. What UK gas price assumption is used to calculate the deferred tax benefit from these acquisitions which are primarily UK gas fields? In the 2018 annual report (available here), the Company used 57.4p/therm starting in 2022 (vs. the current Calendar 2022 forward curve of 39.1p/therm^[2]). We note that the UK gas price assumption is omitted in the 2019 financial statements disclosed on 5 March 2020.

ARCM also notes the Company has raised that it may proceed with only some (and not all) of the acquisitions (Premier Oil's website FAQ, available here). To date, the Company has stated that the most likely scenario was a transaction including all three acquisitions, and a capital raise of $500 million. This was presented as the most likely outcome following the Scheme. In the current conditions, it appears the Company is reconsidering this. Accordingly, we call on the Company to publicly clarify its position on which of the three acquisitions it now considers most likely to be effected, and within what period in which it expects to close such acquisitions. Further, if the Company is no longer considering all three acquisitions, should there be an immediate adjustment to the $267 million gain?

[1] Shareholder's Equity as of 31 December 2019 was US$1,131.5 million

[2] 2022 UK Gas Forward curve as of 13 March 2020

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