Bowleven - Long-term Opportunity

http://www.bowleven.com

bowleven logo
 
Bowleven (LSE:BLVN) is an AIM listed oil and gas explorer with interests in sub-Saharan Africa. The company's share price has been very volatile historically, and this is reflected on both short and long-term timescales. The shares have shed a few percent on their January 1st share price compared to a couple of percent rise the FTSE has enjoyed, although the FTSE has been significantly during most of H1 2013. The same has happened with Bowleven. Having peaked at 100p in March, the shares have retraced heavily to a current price of 63.5p. With 295 million shares in issue, the company has a market cap of £187m.


As illustrated above, Bowleven's shares have certainly eased over the last few months and from a technical perspective this was due to the failed breach of 100p. Whilst it could actually be interpreted that a bearish inverse heads and shoulders formation has taken place, the time period for that would have been 2 years which means that is probably inaccurate. What can be said is that the shares are trading in a medium-term downtrend. At 63.5p they currently rest around a major point of support with the next support leg down at just above 50p although that is not particularly strong. The RSI does indicate that the shares are oversold so a bounce is certainly possible. The share price action is arguably more bearish than bullish, although should 60p hold and be cleared to the upside (i.e. move back to around 75p) then there is reason to be optimistic from a longer-term viewpoint. The MACD offers little help in the way of future direction at this point in time.

Bowleven has a modest directors backing with the board holding a few million shares between them, but clearly this does not represent a significant proportion of the shares in issue. The major shareholders include institutions including BlackRock and F&C Asset Management. Institutions represent a much larger proportion of the shares and account for well over 100m. Short interest is reported to be around 1.7% with those short including AQR Capital - this figure was actually much higher recently though at around 2.6% during mid-May. Through looking at the short positions it is abundantly clear that firms are trading Bowleven with shifts of over 1% of shorts on a relatively short-term timescale. With many of these firms actually closing out these short positions, there is scope for the share price to be driven higher through this. Nonetheless, a distinct change in sentiment plus a wider market turnaround would be needed.

Looking at the fundamental position of the company, the bull case is much clearer (when taking the market cap into account). The company notes:  "It is our vision to build an African focused exploration and production company which in time becomes renowned for its ability to consistently create and realise material shareholder value through exploration led organic growth and niche acquisitions."

courtesy of kevinzim on flickr
The group has operations in two countries currently; Cameroon and Kenya. In Cameroon Bowleven owns 5 blocks; 3 offshore and 2 onshore. These are known as the Etinde (75% working interest) and Bomono (100% working interest) permits respectively and Bowleven are operators of both. With most African countries, the government does have back-in rights of 10% and 20% respectively, but these are not a short-term issue, but rather a factor that has to be accounted for in the long-term when an 'exploitation licence' is granted. The Etinde permit spans two basins; Rio Del Ray to the North and the Douala basin to the South. Bowleven operates in Cameroon through its wholly-owned subsidiary EurOil.

Across the blocks, and accounting for relevant interests, Bowleven has a very healthy contingent resource of 203 million barrels of oil equivalent. Offshore the resources are predominantly large gas deposits with the Isongo Marine Discovery hosting 1.2TCF gas in place (around 840bcf recoverable assuming a 70% recovery factor) although there is a large oil discovery also. This is the Isongo F resource that hosts 225 million barrels of stock tank oil in place (the recovery factor for oil is lower). Onshore at Bomono the resources are classed as mmboe. The mixture of gas and oil should provide diversity itself as gas prices are currently trading at the lower end of their 5 year-timescales compared to oil that are trending upwards. An exploration well has been selected for Bomono in the form of Zingana-1. Bomono is actually being farmed out by Bowleven as the 100% stake is likely deemed too risky, but this process has stalled albeit not abandoned.

Bowleven is not the operator of it's Kenyan assets, but rather Adamantine Energy is. The block is known as 11B is is recognised by the company as representing an early stage exploration licence where Bowleven has a 50% stake. Geophysical surveys and 2D seismic are the main components of the upcoming work programme for the block, with exploration wells pencilled in for 2014. In a sense, the two East/West African portfolio is attractive as it's diverse. West Africa represents a mature oil region (offshore oil production in Cameroon actually started as early as the late 1970s), whereas Kenya represents an upcoming oil-prone area in East Africa where a lot of the wells are wildcats and although risky, have the potential to throw up large quantities of oil. With infrastructure along the entire East African coast steadily being constructed, there is potential for the region to mirror the success of the West. Despite this, the risk of political reform remains a concern for all East African countries. Standards of living remain low across the continent so there is pressure to amend petroleum acts so that they are in the best interests of the civilians as opposed to the companies involved. Obviously though, there is a fine balance between nurturing exploitation of resources and deterring such exploitation.

For Cameroon, an extensive plan has been drawn up that gives an initial proposal for how the resources can be exploited and utilised. This involves using unmanned offshore platforms that all report to an onshore hub along Cameroon's south-west coast. Despite the large resource base, the first production is expected in 2016. Gas production is expected to amount to 70mmscfd initially and will be used at a fertiliser plant. Dependent on the gas price achieved (Fox Davies estimated between $3/mcf and $7/mcf), this will considerably help Bowleven revenue-wise. Furthermore, initial liquids production (excluding liquefied petroleum gases) will amount to 15k-20k boepd. In any terms, these production rates would have the ability to transform Bowleven easily towards a billion pound company. The issue is that the market at the moment only likes imminent revenues and clear income backing from companies. Like most oil and gas companies, Bowleven cannot currently offer that and there are still a large number of hurdles that must be overcome.

petrofac logoA large number of hurdles have actually already been overcome, and these are impressive milestones by any means. The company has drilled an appraisal well known as IM-5 which has 'underpinned fertiliser gas requirements' and has submitted the Etinde Exploitation Authorisation Application (EEAA). IM-5 flowed up to 60mmscfd and produced 7,819 barrels of condensate per day - alone this would generate material revenue to any company and the results far exceeded pre-drill expectations. Furthermore, pricing for the resources was agreed and signed in mid-May. However, the most impressive achievement was most certainly the strategic alliance that the company announced with FTSE 100 major Petrofac (LSE:PFC). Under the terms of the agreement, Petrofac will provide up to $500m towards the first development stage of Etinde, plus Bowleven will be able to claim $60m in reimbursements from the costs of the IM-5 well. These funds will be available upon completion of the Final Investment Decision (FID) that is due in H2 2013. Aside from the raw case, Bowleven will also benefit from world-leading expertise in hydrocarbon technology, especially since the method of payback is through a share of the Etinde revenues. Of course though, the terms for payback are initially steep for Bowleven and include: "80% of Euroil’s entitlement to cost oil until 130% of amount invested has been repaid."

CEO Kevin Hart commented: "I am very happy that Bowleven, through our subsidiary Euroil, is entering into a proposed strategic alliance with Petrofac in respect of our planned Etinde phased development. This complementary union provides Bowleven with potential access to both investment capital and, just as importantly, Petrofac’s extensive development experience. Petrofac’s excellent track record of service provision, including training, will augment significantly Euroil’s strong local presence and capability. Our alliance with Petrofac will help deliver first production from our Etinde project, and represents a major step towards our goal of converting resources to reserves in Cameroon."

courtesy of www.steveconover.info on flickr
Looking ahead, Bowleven is now set to continue its appraisal of the Etinde permit and in tandem with this it is looking to drill two wells at the Bomono permit before the end of 2014 plus continue exploring its Kenyan block. With $42m in the pot at the moment (and no debt), there is no strain financially especially considering the likely availability of the Petrofac funds in the close future.

A number of brokers have positive outlooks on Bowleven. Since March a raft of broker views were reiterated/retained as follows:
- Fox Davies = 250p
- Barclays Capital = 235p
- N+1 Singer = 130p
- Bank of America Merrill Lynch = 215p
- Deutsche Bank = 80p
- Goldman Sachs = 163p
- Citigroup = 110p
- Jefferies International = 105p

It is clear that the price weakness that Bowleven is suffering from is not a problem of it's own making. The company has released numerous pieces of good news, yet the share price has continued to be eaten away at for one principal reason. Hedge funds and investors have lost confidence in the AIM market. The constituents of the FTSE 100, 250 and other indexes have generally all seen their share prices - this is partly due to the companies being high-volume and more stable enterprises so that any large dips are bought into as the companies are strong. This compares to the AIM where a large number of companies are loss-making, especially within the natural resource sector as the timescales involved are long. The result is that sentiment is weak and a few institutions can effectively 'dictate' the share prices of some stocks and trends are increasingly less easily broken despite wider market rallies. No doubt, confidence will return over time, but the issue is that certain shares are seeing their prices depressed to ridiculous levels. Bowleven is part of this price weakness.

Summing up the Bowleven's picture is not an easy task. In the short-term, technical analysis suggests that the share price could slip further before it recovers. As shown on the right though, if the markets rebound then it would be reasonable to suspect that Bowleven could recover in tandem with this. The graph highlights that historically, going long on the FTSE when the RSI was around 30 has been an astute move. Considering the FTSE is currently around 30, a similar, at least short-term recovery, could be the favourable scenario. The ultimate question is whether it is worth waiting for a lower share price. The lower target could be around 50p which is approximately 20% lower than the current price.

Bowleven is undoubtedly a long-term investment, but there is the potential for the price to be at multiples of the current price closer to 2016. In short, the company has a comprehensive and well-funded plan to complete their outlined resources to reserves strategy that will continue through production. Sales are secured and exploration upside remains. Value will undoubtedly be realised, the question is when. With the price lower than before the indisputable success of IM-5, considering the long-run potential, a sensible strategy would be taking a 50% stake of the maximum investment possible and keeping 50% sidelined in case an opportunity closer to 50p presents itself. I have added a personal Buy tag to Bowleven on the review results page.

UPDATE (13/11/13) - Bowleven is sharply lower today following a circa 10% placing. That is despite a hydrocarbon volume upgrade and a purchase of shares by the CEO. The 20% drop looks well overdone thus I have triggered the remaining 50% stake, meaning the review average drops down to 51p. Short-term volatility is likely.

7 comments:

  1. Hello,

    I just read your post on LSE.co.uk and I am very thankful for this post. I have shares in Bowleven and this has provided the reassurance I need. Thank you again

    Robin23

    ReplyDelete
  2. Easy to understand piece. Very good! Signed up via email.

    Krucyk

    ReplyDelete
  3. I am down 50% on my investment and I was losing hope.After reading your excellent post I will average down at some point. Many thanks Elite.

    ReplyDelete
  4. BLVN short term price target is 53p

    ReplyDelete
  5. I've got a target of 25p.

    Technical analysis of a share which is being manipulated and subject to heavy insider trading is going to lead to ruin.

    ReplyDelete