The update released yesterday by Premier Oil PLC (LON:PMO) (PMO.L) was relatively positive in my view. It showed that the oil producer has been able to reduce debt while also progressing with investment in new projects. It also increased production, and this suggests to me that it may be able to deliver improving financial performance in future.
The company’s prospects, of course, are highly dependent on the performance of the oil price. It has risen in recent trading sessions, but I’m cautious about its near-term outlook. I think there are a number of risks facing the world economy which could hurt the prospects for the oil price in 2019, such as poor US-China trade relations and a rising US interest rate.
Therefore, I believe that the Premier Oil share price may experience a period of high volatility over future months. As a relatively small producer with a significant amount of debt still on its balance sheet, it may be viewed as relatively risky by investors. Should the oil price experience a difficult period, this may mean that investors become increasingly cautious about its prospects.
With a P/E ratio of around 3.2, I think that the stock could offer a large margin of safety at the moment. Compared to other FTSE 350 oil and gas stocks, it seems to be relatively cheap. This could indicate that it is able to offer impressive return prospects over future years.
As a result, Premier Oil appeals to a long-term investor like me who is not concerned about short-term volatility. However, I think that it is a company which could fall heavily given sub-optimal operating conditions. Therefore, I’m cautious about its outlook, but at the same time feel that it has a sound strategy and that the oil price could recover after falling by $26 per barrel since October.