UK hydrocarbons producer Premier Oil with strong interests in the Falklands expects to book a 300 million dollars impairment charge due to the plunge in oil prices and plans to cut jobs and investment by 40% compared to 2014, to rein in costs, it said on Wednesday.
Oil companies across the globe are scrambling to deal with a 60% drop in crude prices in seven months, putting them under pressure to find cost savings.
As a result of the low Brent crude oil spot and forward curve price at year end 2014, there will be a material impairment charge in the second half on certain of our assets, the company said in a trading update covering last year. This is currently estimated at $300 million on a post-tax basis.
Premier Oil, whose operations stretch from the Falklands to Vietnam, also said it was reducing investments to develop fields by 40% to around 600 million and that it was renegotiating rates with suppliers to its top 25 projects.
”Capital spending for the full year 2014 was approximately $1 billion (development) and $160 million (exploration, pre-tax). Planned development spends for 2015 is anticipated to be 40 per cent lower at around $600 million. In the light of the low oil price environment, negotiations with a number of key contractors are underway and development expenditure estimates are therefore subject to further review”, Premier reported in its latest Trading and Operations Update.
The pre-tax exploration budget for 2015 is $220 million.
Another consequence of Premier Oil's cost cuts is a decision not to commit to any new exploration work beyond a portfolio of eight key projects, including four in the Falkland Islands.
Premier Oil also said it expected production to fall to 55,000 barrels of oil equivalent per day (boepd) this year, excluding contribution from its North Sea Solan project that is expected to come on stream this year. Last year, Premier Oil exceeded the upper end of its production target, reaching 63,600 boepd.
Despite the expected impairment charge, analysts said the company was well placed to deal with low oil prices.
“Premier is in a strong position to weather a period of oil price weakness due to its long term cash flow generation. This is delivered from a stable production base with low cash operating costs (<$20/boe) supported by a significant 2015 hedging program, a tax advantaged position in the UK and a favorable debt structure, said CEO Tony Durrant.
Operationally, Premier delivered a strong performance in 2014, with production exceeding guidance, key milestones reached on a number of our development projects and non-core assets disposed of in a difficult asset market, he added.
Finally CEO Durrant underlined that Premier will continue to invest in high quality projects only if they are robust at our conservative oil price assumptions and if their cost base reflects the current oil price environment.”
In 2014, Premier achieved record production of 63.6 kboepd, up 9.3% on 2013 and above the upper end of guidance. This strong performance was largely driven by success across the portfolio in improving uptime.