Dublin market may disappoint Premier Oil

THE decision of British based oil and gas exploration company, Premier Oil, to have a full share listing on the Irish Stock Exchange has been described as bizarre by some London analysts. That is probably too strong a word. Nevertheless, the stated reasons for the move are surprising. Indeed, the reasons appear to be based on a mistaken view of the market in Irish exploration shares.

Premier's explanation runs like this. It is attracted to the Irish market because of the recent good run in Irish shares and the high demand for exploration stocks among Irish investors. The spate of recent rights issues is also cited as a reason for the Irish quotation. These views ignore certain facts. The market in Irish exploration stocks has largely moved to London. Increasingly, it is the British punters who have been chasing Irish exploration shares. And many Irish exploration companies choose to raise money, not in Dublin, but in London where they get a decidedly better reception.

It is true that many of the high profile exploration shares have originated in Dublin. There are historic reasons for this. But most such firms have no exploration interests in Ireland. Instead they are located in far away areas such as Pakistan, Syria and in the last few years, the focus has been on Siberia.

So why is Premier, which is capitalised at £310 million sterling, so keen to have its shares traded in Dublin (as well as in London and New York)? It is difficult to find a rational explanation but Premier, which produces oil from fields in the North Sea and Pakistan, obviously perceives Dublin as a location to gain a better share rating.

One fact which cannot be disputed is the current poor rating for its shares. While oil and exploration shares in London have risen by an average of 28 per cent this year, Premier's have barely moved and that could well explain the company's reasoning behind its move to Dublin. And some London analysts contend that it may be an effort to boost the share price.

The introduction to the official list in Dublin has been made by Bloxham Stockbrokers, in association with Christows Stockbrokers. Christows came out with a very bullish report on Premier in August in which it recommended the shares as a "strong buy".

On the Dublin listing it had this to say. "Irish institutions may begin to deal more frequently in Premier but more importantly Irish investors will be able to hold Premier in a special portfolio investment account (SPIA). Holding Premier in an SPIA will enable them to avail of the 10 per cent tax rate, thereby increasing potential returns."

Christows also produced tables which place Premier in a very favourable light. Using the ratio of cash flow as a percentage of market capitalisation, for example, Premier comes out top, among six companies, at 29 per cent. Tullow is lowest at 2.62 per cent. Using the ratio of cash flow available to drive future exploration, it is also top of the list. And Christows notes that the share price is at a discount to net asset value, while other exploration companies are at a premium.

All very impressive stuff. However, this very optimistic view is not shared by some of the other brokers. While noting the recent changes of directors, which have strengthened the board, BZW Research observes: "However, the new chairman (Mr Barrie Stephens) has provoked the setting of a series of targets which look unlikely to be met from the company's existing assets and which could be substantially undershot, or raise the risk that the company will take precipitate action to meet them in the short time scale allowed".

And hammering home the point, the brokers go on to say that the "combination of aggressive targets which are unlikely to be met from the current portfolio and the prospects of forced acquisition suggests there is considerable degree of risk".

Obviously new companies should be encouraged to have their shares quoted on the Dublin exchange. But investors should remember that where there is a potential upside, there is also a potential downside.