Stephane Foucaud: How To Make Money In The Chaos Of Oil And Gas

Companies we like at the moment include Premier Oil Plc (PMO:LSE) and TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ). Premier is a North Sea story, and the market is somewhat concerned with its debt. The company is embarking on a relatively low-risk exploration program in the Falklands. A success could attract a farm-in partner, which would be a rerating event as investors do not seem to ascribe much value to this group of assets. TransGlobe Energy is cheap, and arguably offers the benefit of being in an area where the politics are getting a bit better.

TER: How will TransGlobe Energy's writedown of its Yemeni assets affect the company?

SF: I think the writedown was broadly expected. The situation in Yemen is difficult and pretty complex. We are not fundamentally surprised that the company decided to write down its assets. The contribution to the company value compared to shareholder expectation is absolutely minimal.

TER: How has Premier Oil responded to the collapse in oil prices?

SF: Premier has kept its net debt almost at the same level. The net debt level has been higher than the current market cap for some time.

The fact that Premier explores in the North Sea means it is, by definition, quite sensitive to the oil price. At one point, the share price was half what it was before the oil price collapse. That's quite significant given that Premier is one of the blue-chip exploration and production companies listed in London, with good hedge in place on its production. The shares are also very liquid.

So it has been difficult. The value of the company has gone down because the oil price is lower and it has fairly high-cost assets. But, again, that's what you'd expect in a world where the oil price drops.

TER: Premier has described its hedging policy as "conservative." What does that mean in practice?

SF: It means that the oil price at which the company is hedged is quite high, and that a fairly important component of its production is being hedged. Particularly when you look at the lower oil price environment, the overall cash flow of the firm is enough—or close to being enough—for the company to operate with confidence.

"Any deviation from the broad assumption of production not dropping this year in Russia could be very meaningful."

For instance, if the indebtedness of a company is quite low, and if the costs associated with its assets are also quite low, one would argue that such a company would need less hedging than a company that needs a high oil price to make its assets work and to repay debt. By "conservative," Premier means it is quite resilient to a low oil price, and can deal with fairly high-cost assets and a high level of debt.

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Disclosure:

1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides ...

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