Premier Oil PLC (LON:PMO) (PMO.L) shares soared 30% this week on news of a massive discovery in the Gulf of Mexico. While everyone was piling into the shares, the associated retail bonds rose just 5%.
The retail bonds (PMO1) were issued at 100p in 2013, paying 5% p.a. with maturity in December 2020. The fall in the oil price over recent years hit both the shares and the bonds hard as questions were raised about the company’s ability to meet the covenants and repayments associated with its debt.
Along with much of the oil industry, Premier Oil has now reduced costs and refocused its investment. It has also needed to restructure its debt – a process which now appears to be coming to an end.
The result of the restructuring for the retail bonds has been a modest extension of the maturity date from December 2020 to May 2021, and an increase in the coupon rate from 5% to 6.5% to compensate investors for changes to the maturity and other terms of the loan.
Why do I plan to buy the bonds instead of Premier Oil shares? Well, if I buy the bonds today at 87p and hold them until their maturity in 2021, I will be paid interest over that time and receive back 100p at the end (provided that the company is able to meet all of its payment obligations).
Provided that the company is able to repay in 2021, I am looking at a potential combined return in terms of capital and interest of over 10% per annum, with possibly less inherent risk than the shares, which I think may be more vulnerable to volatility in the oil price.
This week’s announcement from Premier Oil regarding its discovery may go some way to providing more certainty in terms of valuable assets and cashflow into the future. I think this could help to support the bonds and the company’s ability to repay or refinance the debt in 2021.
Clearly, the price of the bonds at 87p indicates that not everyone is confident of what the state of the company will be in 4 years’ time, given the pressures on the oil price. The risks with this investment are relatively high in my opinion, but I believe the risk /return calculation on the bonds to be attractive at this point and I’ll be buying some more.