Premier Oil secures relaxed debt covenants to deal with weak oil prices

Goodbody Stockbrokers said: “While the backdrop of falling oil prices is clearly weighing on the sector, confirmation that the Solan development remains on track for initial production in Q4 and amended covenant headroom should provide some respite for the share price”.

Premier Oil’s move to renegotiate its debt conditions, relating to the extent its debt repayments are covered by earnings, shows oil companies and their lenders are concerned about oil prices remaining weak for longer.

Under the terms of its agreement with the lending group, Premier has agreed not to pay out a dividend for two years.

The company said it expects to cut debt with banks and bondholders as production increases in the North Sea.

The company reported a first-half net loss of $375.2 million compared with a profit of $172.7 million a year earlier.

“Like the rest of the industry, we need to be prepared for a period of sustained commodity price weakness”, said Chairman Mike Welton in the company’s results statement.

Premier plans to cut capital spending from $1.4 billion this year to $500 million in 2016. Meanwhile, production was a little lower than last year, at 60,400 barrels of oil equivalent per day compared with 64,900.

“For our part, we have continued to capture sustainable savings in our operating costs, to defer discretionary capex and to actively manage our portfolio”.

Premier’s ability to expand production depends on when the first oil flows from the Solan field in the North Sea, Bloomberg Intelligence analyst William Hares said in a note August 18.

The FTSE 250 firm said costs associated with its flagship Shetland project, coupled with lower oil prices forced the impairment writedown on Solan, which is expected to come onstream in the fourth quarter of this year.

The North Sea, where many fields first tapped in the 1960s are now depleted, is one of the world’s most expensive areas to operate.