What to do next?
I’ve mentioned quite a few times in my various columns that I believe that Premier Oil’s ill-fated retail bonds warranted contrarian attention. I certainly own a few. Without going over old ground, the investment rationale is that Premier Oil is likely not to go bankrupt. In fact, it might emerge as a leaner, stronger entity gobbling other assets.
In these circumstances a default on its debts is unlikely. Crucially Premier has been renegotiating its institutional debts, with a new deal that will include the smaller retail bondholders. Details of this new deal are now out. My overall impression is that they make the Premier Oil bonds MORE attractive but first let’s examine what’s being offered.
First thing to say is that the deal is complicated and frankly the business hasn’t done a great job of explaining to retail investors what’s involved. But wading through the deal three things stand out
- The interest rate is being increased from 5 to 6.5%
- The duration of the bonds has been extended by an extra six months
- Bond holders are being compensated with equity warrants that in aggregate amount to a 3% overall dilution of the ordinary share base. Slightly confusingly investors who don’t want equity warrants can also take synthetic warrants that offer the same terms. The warrants strike value is at 42.375p a share.
If all goes to plan the deal will be effective from 28 July.
Being honest 6.5% interest feels like the rate Premier should have paid from the beginning. It was a riskier investment and 5% felt a bit skimpy. Duration extension is no bad thing if you are predominantly interested in the income flow. And there is now a chance that you might also benefit from the equity warrants if the ordinary shares do increase in value.
Premier’s prospects in effect depend on the oil price. I am no bull on the price of oil. My sense is that any consistent price above $50 results in yet more US unconventional oil coming online. But any price much below $45 feels seriously uneconomic for OPEC, the shale guys and much of the rest of the industry. My sense is that oil will move around between $40 and $60 a barrel for the foreseeable future. Premier has made great strides in reducing its output costs and there is a decent chance that it could make profits at these levels. If it does, it will make money for the bond holders.
So in sum, I think the deal makes sense. Vote for it if you want although my sense is that the deal will go through regardless of what retail bondholders think. I am taking the equity warrants gratefully and I might even be interested in buying more of the retail bonds so I can take advantage of the higher yield and the warrants on what I think is a decent mid sized oil company.