ARCM Question List #5 - Is Premier Oil's Pro Forma "Leverage Ratio" Accurate

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:

1. 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?
   
   
2. 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?
   
   
3. 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?
   
   
4. 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)

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