Midas share tips: Premier Oil & BAT

By THIS IS MONEY
Updated:

 

Premier Oil is an unusual company in today's market. It is making a sizeable acquisition, with a rights issue to help pay for the deal - and its share price has risen in response.

Normally, companies' share prices fall in such circumstances. Investors worry about the effect of an acquisition on the underlying business and they calculate that as a rights issue introduces more shares into the market, each share is worth less.

The fact that Premier's stock has risen since the acquisition was announced is testament to brokers' enthusiasm for the deal. Premier is an oil and gas company whose business has largely been focused on Indonesia and other parts of Asia.

It also has interests in the North Sea, but these have been in decline over recent years. However, the latest acquisition should dramatically reverse this trend.

Premier is paying £350m for the North Sea operations of Oilexco, a company that was worth more than £1.5bn as recently as last September. But the group fell foul of the falling oil price and the credit crunch, so it was unable to refinance its debts when they fell due and it went into administration.

Premier is picking up the business at a bargain basement price and acquiring £650m of losses that can be written off against tax in the future.

Chief executive Simon Lockett has been searching for a decent UK acquisition since he took the helm nearly four years ago and this deal will take Premier's oil production from about 37,000 barrels a day to more than 50,000. The hope is to increase that figure to at least 80,000 in the next couple of years.

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Existing shareholders have been enthusiastic about the deal, which is being partly financed through bank debt. The rights issue aims to raise £171m by offering investors four new shares at 485p for every nine held.

There is still time, just, to subscribe for this rights issue, but new investors may find it easier to wait until later this week, when the ordinary shares go 'ex-rights'.

The share price will almost certainly go down then because investors will no longer be entitled to the rights.

The shares closed on Friday at 1228p. Once they go 'ex-rights' on Tuesday, the price should fall to about 990p and they are likely to stay near this level for the next few weeks until the rights issue is fully completed.

Midas verdict: It is easy to become bogged down in the complexities of rights issues and their impact on a share prices. But the key question is whether Premier Oil is a well-run business with decent prospects.

The answer here is a definitive yes. Oilexco has come at the right time at the right price, moving Premier into a different league. The shares are expected to rise substantially over the next year or so. Buy.

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