The Investment Column: Discount on Premier Oil shares makes it worth adding to reserves

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The Independent Online

This year is shaping up to be one of the most exciting in Premier Oil's history. The drilling programme the group has in place, in faraway places such as Pakistan, Vietnam and Guinea-Bissau, has the potential to double the value of the company if successful.

Premier is on something of a roll. It has had two important exploration hits in Indonesia since the start of the year. Separately, during February, its Chinguetti field off Mauritania started producing oil for the first time. Analysts believe the good news from the west African country is unlikely to stop there. Premier and its partners are deciding whether it is worth developing the Tiof field. The company owns 9 per cent of the site which some believe could contain between 200 million and 400 million barrels of oil.

Although there is plenty of upside in Premier shares, what makes them a good bet at present is the fact that there is little downside. The company reported forecast-busting annual results yesterday. Profits soared to $126m (£73m) from $59m. The figures also showed that Premier is valued by the City at a discount to the value of its oil and gas reserves. It is the only player in the UK exploration and production sector to be treated in this way and given its recent successes, this is unjustified.

Premier bought back large amounts of its shares last year. Analysts believe one of the main reasons for this was the management's view that the shares were undervalued. The fact that they are considering further repurchases in 2006 means they remain so. Investors should take advantage of this and buy.

Uniq



Uniq, the maker of convenience foods for supermarkets, issued yet another profits warning yesterday. It was the company's third in a little more than a year and the first since Geoff Eaton took over as chief executive in August. Uniq complained of trading difficulties across all three of its divisions.

In the UK, it revealed the recovery at the Minsterley desserts business is flagging. Separately, Uniq's southern Europe operations have been hit by increased price competition because of new regulations on the selling prices of branded products in France, while by the company's own admission the performance of its northern Europe division "remains disappointing". Analysts moved quickly to downgrade forecasts. They expect profits this year to come in at about the £4.5m level compared with £7m before the warning.

Uniq finds itself in a tricky position. It is sandwiched between powerful supermarkets and rising energy costs. A weak balance sheet does not help matters. The company has a pension fund deficit of £103m and debt of about £50m, and there were suggestions from some analysts yesterday that it is right up against its banking covenants.

Given these factors, it is no exaggeration to say shares in the company are a high-risk investment. The fact that at yesterday's close of 121p they trade at more than 30 times forecast earnings for 2006 only makes things worse. Sell.

Augean



Handling hazardous waste may not be the most pleasant business in the world but it is certainly a very profitable one. Results yesterday from Augean, the UK's largest operator in the field, highlighted this. The company revealed full-year profit of £3.7m on sales of £26m. Brokers forecast this to rise to £5.1m by the end of the current financial year.

Augean's business model is simple. It has three specially engineered landfill sites in the UK where it can dispose of waste. Profitability really took off when in July 2004 the European Union passed legislation insisting on the separation of hazardous from non-hazardous waste. After the edict, prices for handling the former rose fourfold. Augean is one of just a handful of operators with a licence to handle hazardous waste has been making money ever since.

The company now dominates the industry. It controls 24 per cent of a £400m market, based on conservative estimates. This is unlikely to change soon. There are high barriers to entry which protect Augean's position in the market. Estimates suggest it would take five to seven years for a rival to set up a facility.

Going forward Augean looks set to cash in from a trend which sees more and more waste being classified as hazardous. This is because the EU's rule change is enforced more effectively with every day that passes.

A lack of policing caused the group to suffer from weak volumes during the tail end of last year and caused November's profits warning. This episode is firmly in the past. Trading at just 10 times cash flows, the group's shares should be bought.

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