Update on ARCM Question List #3: Premier Oil Becoming "Premier Gas" - Recent Negative Developments in the UK Gas Market Add to the Concerns Around the Proposed Acquisitions

LONDON, Feb. 17, 2020 /PRNewswire/ -- Under Premier Oil's proposed scheme, creditors are being asked to defer debt maturities for a second time in three years. This time it is for the purpose of facilitating the Company's large speculative bet on the UK gas market, which involves taking on an additional $600 million of pre-tax decommissioning liabilities.

In ARCM's third question list, published on 29 January (available here), we expressed considerable concern that the proposed acquisitions will significantly increase the Company's exposure to the UK gas market which, as indicated by the forward curve, is experiencing a negative change in fundamental supply/demand conditions.

This change in the supply/demand dynamics has further accelerated in recent weeks and, considering the operational risks associated with acquiring aging assets and the assumption of decommissioning liabilities, ARCM believes it is increasingly critical for the Company to provide transparency around the true economics of this UK gas portfolio.

In this regard, and at a minimum, ARCM calls on the Company to provide its stakeholders with an economic analysis of these assets at the forward curve so the Company's stakeholders can fully understand the potential risks associated with these acquisitions.

Deteriorating Gas Market Fundamentals and The Implications

As referenced in ARCM's third question list, published on 29 January (available here), the fundamental change in the UK gas market has primarily been driven by two factors: (1) the rapid growth in global LNG export capacity resulting in LNG oversupply, and (2) Russian and Norwegian gas suppliers defending market share against LNG supply into Europe.

With global LNG exports projected to reach new records over the next two years, Gazprom publicly committing to maintain its market share, and Norway recently confirming that it will not reduce production to support prices, it is very difficult to see a fundamental improvement in the UK gas market for the foreseeable future.

As previously stated, one of ARCM's main concerns around these acquisitions has been its expectation of a fundamental change in the UK gas market, which has now been confirmed by the dramatic move lower in the forward curve (please refer to the chart below). This change has also been evidenced in recent weeks, with several companies expressing their negative views on the UK gas market and Centrica taking large impairments and lowering its outlook for future gas prices (see notable recent press articles in the appendix).

How Exposed Are the Proposed Acquisitions to UK Gas?

The proposed acquisitions have limited oil production. As shown in the chart on page seven of the Company's presentation on 7 January 2020 (available here), the Andrew Area's liquids production will decline to 7-8 kboepd in 2022 and below 6 kboepd in 2023. The rest of the portfolio of acquisitions, including the Andrew Lower Cretaceous ("Andrew LC") Development, Shearwater and Tolmount, is primarily UK gas with some gas condensate.

Based on the Company's RNS and presentation on 7 January (available here and here), and as illustrated in the chart below, the production from these acquisitions will be 70-80% gas and gas condensate by 2022-2023.

Operating Margins for These Gas Assets Are Negligible at the Current Forward Curve

Per the Company's disclosure on page seven of its RNS on 7 January (available here), the Company states that "opex of the Andrew Assets, Shearwater Field and Tolmount is expected to be less than $20/boe for the period 2019 to 2024."

As of the date of this statement, at the current forward curve, calendar 2020, 2021 and 2022 UK gas prices are 26.8p/therm, 37.1p/therm and 41.2p/therm, respectively. This is equivalent to $20/boe, $28/boe and $31/boe⁽¹⁾, leaving the Company with limited operating margins of $0-11/boe before incorporating any capex for these assets. It is worth noting that, as stated on page seven of the Company's presentation on 7 January (available here), the Company will spend $120 million ($13.3/boe based on 9 mmboe resource) of capex to develop Andrew LC. These operating margins contrast significantly with oil assets, which would typically generate $40-45/boe of margin at similar opex levels.

Appendix

Footnotes

1. Forward curves from Bloomberg as at 2/14/2020. p/therm converted to $/bbl by multiplying with FX rate (calculation assumes 1.3 USD/GBP) and 0.58 therm to bbl conversion factor 
2. Production profiles estimated from the 7 January Company presentation. Detailed breakdown below:

Andrew:

• Assuming all standalone Andrew's liquids production is oil and it represents 89% of the production going forward (as per 2019 liquids/gas mix profile on Pg 6) in the chart on Pg 7
• Gas production profile includes Andrew LC as provided in the chart on Pg 7 and 11% (using the 2019 gas mix as per Pg 6) of the standalone Andrew production

Shearwater

• Shearwater liquids are assumed to be gas condensates as stated on Pg 8 of the presentation
• Shearwater gas profile as provided in the chart on Pg 8 of the presentation

Tolmount

• Tolmount is entirely a gas development. 2022 production as stated on Pg 9 of the presentation and 2023 production estimated from the chart on Pg 9 (Chart provides production for PMO's pro forma 75% which is divided by 3 to get to the production for the 25% that PMO is acquiring)

Photo - https://mma.prnewswire.com/media/1091053/ARCM_UK_Gas.jpg
Photo - https://mma.prnewswire.com/media/1091052/ARCM_combined.jpg

For media enquiries, please contact:
Greenbrook Communications
arcm@greenbrookpr.com
+44-207-952-2000

For all other enquiries, please contact:
Asia Research & Capital Management
premier@arcmcap.com