Our Premier Oil interest looks safe as the company continues to cut its debts
The oil firm is nibbling away at its borrowings and the interest on our retail bonds looks secure
THE bond market, to paraphrase LP Hartley in The Go-between, is a foreign country: they do things differently there.
So when this column checks on the progress of its fixedinterest holdings, such as Premier Oil’s 2021 retail bonds, it needs to adopt a different frame of mind from the one used when stocks are under scrutiny.
Premier announced interim results yesterday and Questor’s eye was drawn to the figures for debt and cash flow, rather than the profits and dividends that would normally attract our attention.
Over the six months to June 30 net debt fell marginally to $2.65bn (£2.06bn) from $2.7bn at the end of the full year in December 2017. When we published an update on Premier’s bonds in March, after last year’s results
were announced, we quoted a forecast from Peel Hunt, the stockbroker, that reduction in net debt would accelerate from the second quarter of this year.
The broker said then that it expected a “meaningful” reduction in net debt of around 15pc during 2018, taking it to $2.2bn-$2.3bn. Yesterday it reined back on that forecast slightly, saying it now expected a figure of $2.36bn, and $1.96bn next year. Cash flows from operations in the first half of this year were $276.6m, compared with $282.7m at the same stage last year. However, capital expenditure amounted to $164.3m and the interest bill was $125.5m, on top of various smaller outflows of cash.
This reinforces the sense that debt reduction will be relatively slow unless the firm becomes appreciably more productive – and various projects are in the pipeline – or oil prices rise. Peel Hunt said “strong recent production performance gives us confidence that cash generation will increase significantly in the second half of this year”.
Things are going in the right direction at the company and there is no sign of a threat to Premier’s ability to meet its interest bill. A glance at our graph, which shows the bonds trading above their £100 par value, suggests that the market agrees. We paid £81 when we bought in 2016. Hold.
Update: Regional Reit
Regional is the Income Portfolio’s most active member, judging by the number of stock market updates it publishes. In each of the past two weeks we have reported disposals by the property trust; last Friday it announced the purchase of a portfolio of assets for £31.4m. The properties involved are offices in Hull, High Wycombe, Stockton-on-tees, Ipswich, Clevedon, Wakefield, Deeside and Lincoln. They are let to 24 tenants and are expected to provide a net income of about £2.8m a year, which equates to a net initial yield of 8.7pc.
The trust’s manager said the prompt redeployment of disposal proceeds ensured that money would not sit idle, adding that the acquired portfolio paid better yields than the assets sold. It said the newly acquired properties offered opportunities for improvement and therefore better returns. The portfolio “complements our existing income streams and further diversifies both our tenant base and our exposure to different regions”, the manager added.
The market seems indifferent to progress at this trust and the shares barely moved but readers can hope at least for dividend rises in due course. Hold.
IHT portfolio update: Kromek
Shares in Kromek, the maker of specialist detectors, have given readers a modest gain of about 5.3pc since we added them to our Inheritance Tax Portfolio of Aimquoted stocks in January.
The company has announced four new contracts in recent weeks. On July 23 it said the American government had committed to spend at least $2.6m on next-generation detectors. The shares barely moved. Then on Aug 20 it said it would sell detectors worth a combined $1m to two other customers. The shares this time jumped by 14.9pc, illustrating the market’s continued fickleness when it comes to this stock. Hold.
In yesterday’s column the text stated Brunner’s closing share price incorrectly. It should have been 781p