ARCM Question List #5 - Is Premier Oil's Pro Forma "Leverage Ratio" Accurate
February 25 2020 - 2:00AM
PR Newswire (US)
LONDON, Feb. 25, 2020 /PRNewswire/ -- As detailed in
ARCM's recent statements (available here), we continue to pose
questions to Premier Oil relating to the proposed
acquisitions. For the benefit of all stakeholders, we call
upon the Company to provide full and transparent responses to these
questions.
This question list considers the Company's stated pro forma
leverage ratio and the assumptions which form the basis for the
Company's calculations. On page four of Premier Oil's presentation
from 7 January (available here), the Company states that the
proposed transactions would "significantly reduce forward
accounting leverage ratio towards <1x by Q4 2021". Whilst this
statement has been widely quoted by sell-side analysts in their
coverage of the proposed transaction, we believe stakeholders need
to have the answers to the following questions in order to fully
understand the pro forma leverage metrics:
- When evaluating the financial effects and risks of the
transactions, does the Company consider "accounting leverage ratio"
at the end of 2021 the most appropriate metric for stakeholders to
consider? Given that this metric is enhanced by short-term EBITDA
uplift in exchange for medium-term liabilities, would stakeholders
be better informed by considering financial metrics which reflect
the longer-term impacts of the transactions, including the
assumption of $600m in pre-tax
decommissioning liabilities from BP?
- What commodity price is the Company assuming for Brent and UK
gas for 2021 for the leverage calculation? By how much would the
2021 EBITDA figure and Q4 2021 leverage ratio change if the Company
was to use the current forward curve for Brent and UK gas of
$56/bbl and 37p/therm,
respectively?
- What net debt figure is the Company using for the "leverage
ratio" calculation? Does it include the letters of credit that are
part of the covenant net debt calculation? Based on the latest
available figures, letters of credit are around $400 million[1]. What is the
projected net debt figure by Q4 2021 including letters of
credit?
- What is the Company's pro-forma free cash flow projection for
2020 and 2021 (from operations before proceeds from asset
disposals), which could be used to reduce leverage? What would that
pro-forma free cash flow figure be if the Company was to use the
forward curves for both 2020 and 2021?
[1] Includes LCs of $371m and
Mexico/JV cash of $28m as shown in on p. 7 of the Company's 2019
half-year data book (available here)
Contact:
Greenbrook Communications
arcm@greenbrookpr.com
+44-207-952-2000
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