There appears to be renewed ‘short selling’ interest in Premier Oil PLC (LON:PMO), whose reverse takeover by private equity-owned Chrysaor Holdings should complete sometime this quarter.
Short selling, or ‘shorting’ is where an investment company borrows shares and sells them in the hope of buying them back more cheaply at a future date.
While the practice is often vilified as preying on the City’s weak and vulnerable, it is a staple strategy among hedge funds that often deploy it as part of a multi-layered approach.
According to the ShortTracker service, 11.4% of the Premier’s stock is out on loan, up from around 8% in September.
Okay, that figure was 22% last March when speculators were betting the business, weighed down by massive debts, might go bust against a backdrop of plummeting oil prices and a looming recession.
The Square Mile was of the same opinion as the share price hit a nadir of 13p early that month.
Premier’s fortunes took a surprising turn of events last October when Chrysaor popped up as a merger partner. This staved off what looked like inevitable failure.
As mentioned, the sellers have become more prevalent in recent weeks, making Premier once again the City’s biggest ‘short’ – and by some margin.
So, what have these wily speculators seen that the rank-and-file investor might have missed?
Is it a bet against UK/North Sea oil, which is 93% of the enlarged group’s proved and probable reserves?
The answer – possibly. But don’t underestimate the execution risk associated with Premier’s merger with Chrysaor.
This was a complicated deal, with multiple moving parts – which leads one to conclude there is scope for the wheels to come off at some point.
The transaction means Premier equity holders live to fight another day, though they will be diluted down to around 5% of the enlarged business.
It also provides a solution for holders of £2.2bn Premier debt, but also creates a problem too.
The debtholders that took equity will create what’s called an ‘overhang’. Think of an avalanche: one stray yodel and a pile of ice and snow wipes out skiers on the lower slopes.
So, the shares owned by former owners of Premier debt, who aren’t natural holders of equity, could at any point be dumped on the market like an errant batch of the white stuff.
If you believe in the overhang thesis then the share price for enlarged Premier (which will be known as Harbour Energy) is only going one way – down.
For Chrysaor the merger was all about the tax benefits, which, according to City estimates have a present value of £3bn. This, and the addition of further output, which will create Britain’s biggest oil producer at 250,000m barrels a day.
Chrysaor’s existence reveals the attitude of big oil (think BP, Shell, Total et al) towards the North Sea, which is now seen as something of a backwater for international E&P.
It is, after all, the amalgam of Royal Dutch Shell’s and ConocoPhillips’ legacy assets in the waters off the UK.
And it’s not alone. Neptune and INEOS have also stepped in to fill the shoes of the exiting majors as daily production long ago moved into decline and costs continue to steeple.
You also have to understand what Chrysaor’s private equity backers appear to be implying with their actions. After all the RTO (and stock market listing) provides a mechanism to exit UK oil and gas.
We don’t know if this is actually the plan – but the sellers have not been slow in tuning into the mood music.
Where it probably all goes wrong for our speculators is if the Brent crude price continues its sharp ascent and goes through US$60 a barrel and beyond.
For reference, in late October, when the short interest began to reignite, a barrel of the black stuff was changing hands for around US$37. Today it will set you back US$55.
Sometime in the early part of this year – most likely February or March – the Chrysaor/Premier marriage will be consummated.
The group will trade at the upper echelons of the FTSE 250 as Harbour Energy, led by former Shell director Linda Cook.
You suspect, with the sort of interest being tracked, they won’t find it an easy stock market ride.