Broker tips: Premier Oil, BP, JD Wetherspoon

Premier Oil rallied on Tuesday as Investec upped the stock to 'buy' from 'hold' and lifted the price target to 150p from 135p noting that the company has finally started to deleverage.

The brokerage said it expects Premier to exit 2018 with net debt of $2.3bn and generate a further $500-600m of free cash flow in 2019.

"This matters because as debt falls, the call will become less about Brent and more about the assets and delivery. Importantly, the latter is going well with Catcher now likely to produce upgrades and Tolmount sanctioned. Sea Lion will continue to divide opinion, but at least at these levels you’re not paying for it. In the background, UK gas pricing can provide a tidy tailwind."

Investec said it's hard to overstate the importance of the Catcher field to Premier, as the company can’t deleverage without the project. In addition, it drives a significant proportion of the tax loss value.

"As a result, news at the interims that the field is performing ahead of expectations was a particular boon," it said.

Investec also highlighted a "tidy tailwind" from UK gas prices, which have risen through the summer period and now stand at around 75p per therm compared to the brokerage's previously assumed 45p a share.

Analysts at Berenberg sounded a 'bullish' note on Big Oil, initiating coverage of BP at 'buy' and setting a target price of 665.0p.

"The stars are aligning", the broker said, pointing to lower costs, growing output and higher prices for crude oil which were driving the strongest free cash flow seen in the sector since 2006/7.

Furthermore, costs had come down by enough to ensure dividend sustainability at oil prices ranging from $50 to $60 a barrel, or half the average seen between 2011 to 2014, analysts Henry Tarr and John Gleeson told clients.

Some companies were also set to benefit for their downstream operations as a result of the new International Maritime Organisation regulations, even as strong demand and the impact of America's sanctions on Iran pushed the average price of Brent in 2019 to $82.5 per barrel.

Yes, longer-term, say in 2020, crude oil prices would fall back towards $65 a barrel, the German broker said, but even then the sector's current EV/DACF multiple would be 10.0% below the 10-year average at an oil price below then current spot prices.

"Ongoing capital discipline combined with limited competition and high capacity in the service sector should drive attractive returns on new projects, with many conventional projects now breaking even below USD50/bl,and delivering higher returns than US shale," the broker said.

"Accretive projects will drive sector returns higher, funding growth and increasing shareholder distributions."

Among the "key" risks that Tarr and Gleeson were watching were emerging markets and the US economy.

Fully 70% of increased oil demand for 2019/2020 was expected to come from non-OECD countries, hence their focus on trends in demand, global trade and EMs.

"Weaker EM growth could drive sentiment and oil prices substantially lower. US shale growth could also outpace our assumptions, driving the market back into surplus, and oil prices lower, earlier than we currently forecast."

Analysts at Berenberg upgraded pubco JD Wetherspoon to 'buy' from 'hold' on Tuesday, labelling the landlord as a clear "category killer" in the value pub market thanks to its relentless drive towards price leadership and customer satisfaction.

Berenberg said that by accepting lower margins and higher volumes, Wetherspoon's has "consistently outperformed the wider pub market" over a number of years.

Furthermore, with like-for-like growth averaging more than 4% since 2012, the broker thinks its position as a cult brand has been firmly cemented.