Bowleven - Long-Term Opportunity

http://www.bowleven.com/

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Bowleven (LSE:BLVN) has seen its share price tumble following an equity placing in November. I first looked at Bowleven in June, when I concluded that the assets merited a higher share price, but that it could only be considered a 'Long-Term Opportunity' and that there was a very real risk that the share price could drift towards 50p. Consequently, whilst I was bullish, I only put 50% on the stock at north of 60p. Following a drift, and then a spike downwards I recently updated the review noting that the drop was overdone and that it made sense to trigger the remaining 50%. That has brought the site average down to 51p versus the current share price of 38p, so there is clearly still an unwelcome gap between the two numbers. However, the recent share price decline looks out of place, and based on market sentiment as opposed to what should be a sustainable price in the long run. Damaged sentiment is never easy to repair, thus tangible progress needs to be conveyed by the board - the last 6 months has effectively been a delay on the key targets. With an enlarged number of shares in issue and a share price of 38.00p, Bowleven is now valued at £123.2m.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2013/06/bowleven-long-term-opportunity.html


Initially since the first review, the shares struggled to build up any price strength. Part of the reason for that was down to BlackRock selling down their stake from over 16% to below 11% (currently). That wasn't helped by the low volumes, and also other institutions cooling on oil and gas companies. An important question is whether BlackRock are planning to sell the remaining stake, or whether the reduction was down to reducing their exposure. The increased volumes following the drop should allow institutions to sell down if necessary. That said, broker targets for Bowleven remain high. Since July there have been three adjustments. Citigroup and Fox Davies have reiterated their Buy recommendations with 110p and 250p targets respectively. Barclays Capital have kept their Overweight rating, but have reduced their price target down to 135p.

It's worth pointing out at that the price weakness
data according to digitallook.com
has not been helped by a lack of institutional support of the sector. That is largely down to institutions seeking out the sectors who are outperforming the market, and following the gains rather than trying to buck the trends. Therefore any upside catalysts may be limited to a sharp oil price rise, in the interim. Of course, whether that is likely or not is another question, so the bottom line is that price performances will be closely linked to the performance of the individual company.

The heat map on the right illustrates this point. The heat map is for all oil and gas producers who have a market cap in excess of £50m. The majority of the companies have experienced a declining share price despite wider market strength. Furthermore, a lot of the price gains are low single digit gains which shows the under performance. On the other hand, the upper end shows that the market is willing to back those companies who are delivering and in a busy operational period - Bowleven has not possessed those attributes over the last 6 months, but it could in the next 6.

The price drop near the end of the year is very clear on the charts. The drop exceeded 20% and has been followed by a short-term downtrend. That is not particularly surprising - usually after such a steep drop a company enters one of two trends; either a short term downtrend, or a sharp recovery. Due to the damaged sentiment, Bowleven has entered the former scenario. Companies usually then consolidate out of this downtrend. Bowleven has done that successfully. To see this, look at the white chart within the large yellow chart. The white chart represents the intra-day movements. As shown, the shares completed a false breakout to the downside, and have now consolidated out of the top of the downtrend. That bodes well and hints that selling pressure has dissipated. The only warning regarding this is that the breakout has occurred over a period of the year when institutions are less active within the markets. Nonetheless, any further move upward would signal that a return above 40p is likely. So whilst the technical picture doesn't look great, there are preliminary indications that the price decay has ceased.

The first place to start is with the placing. The placing was completed at 45p/share and included the issue of 29.5m new shares (roughly 10% dilution). The equity issue raised gross proceeds of £13.3m. Investors were unhappy that the placing was completed at a discount, but being realistic that was always going to be the case. That means the shares are currently trading at a significant discount (18.5%) to the placing price - the price that institutions are willing to pay. Assuming net proceeds from the placing are £11.5m, Bowleven emerges the other side of the placing with a market cap of £123.2m and with cash probably around £17m-£19m. There is also a $5m bank guarantee that will be received upon completion of the Kenyan (Block 11b) work programme (which Bowleven are being carried through by a partnership with First Oil).

The placing was bundled in with the preliminary results statement which had a number of key points:
- Expanded Exploitation Application (EEAA) submitted to the authorities and pending approval
- First gas pencilled in for H2 2016 with joint FID targeted by H2 2014
- 30% increase in net contingent resources to 263mmboe. This figure also excludes IF figures which will be reviewed with a revised figure being added
- Potential for additional gas offtake agreements to satisfy additional gas production
- "While these financial resources are sufficient to deliver our immediate targets, the addition of further financial flexibility remains a priority for the Group. Consequently, active discussions are underway with a range of potential financial providers, and with a number of specific parties regarding potential farm-outs"

The overall set of announcements was therefore fairly negative. There was an equity placing at a material discount, a confirmed delay in the FID date, hints that more cash is required (either through debt, equity or an asset farm down) with the only positive news being the increase in net contingent resources, but even that was likely following the success at the IM-5 well. Nonetheless, a 20%+ drop was excessive as much of this had been priced into the market.

What matters though is that the market disagreed, and the market hates delays and unfulfilled promises. Whether down to damage limitation, or the directors seeing genuine value, the directors did purchase shares in the market, albeit the combined sum was not massive.
- CEO Kevin Hart bought 100,000 shares at 45p (£45,000)
- Exploration Director Ed Willett bought 50,000 shares at 40p (£20,000)
- Director Peter Wilson bought 20,000 shares at 42.9p (£8,580)

With the Etinde development seemingly stalled, there was little comfort offered in respect to the 100% owned onshore Bomono permit, where Bowleven are obliged to drill 2 wells before the end of 2014, under the permit agreement. Discussions regarding Bomono have become protracted after the preferred partner encountered difficulties and pulled out of the running and that uncertainty offers little comfort for investors.

The 2 wells are to target tertiary level prospects. The Bomono permit also has potential at the Cretaceous level with it supposedly being an extension to a well developed offshore area, but that will require higher resolution seismic in order for it to reach drillable status. The first plans for Bomono are to drill the Zingana-1 well which has a targeted resource of 309mmbls and 420bcf HIIP in two sets of sands, B&C and D&E. The second well is Moambe-1 which had a targeted resource of 180mmbls and 233bcf HIIP. The fact that these are onshore wells means that it will only take a small resource find for it to be commercial. That said, well drilling is always risky, so there are no guarantees.

The problem is that the timescale for drilling is becoming ever shorter. Whilst the Zingana-1 well is prepared, and ready to be drilled, the ever-shortening time window could deter a potential partner. Realistically, with the well prepared, I'd imagine Bowleven will be looking to thrash out a deal, perhaps cutting down their initial demands (fully funding both wells for up to 50% WI). I expect the Bomono farm-out to materialise during the first half of Q1, even if it means Bowleven have to fund a minority share. That could be a short-term catalyst One reason why they should thrash the deal out is that it gives Bowleven the speculative appeal again, and that is a facet it has missed for a while now. That speculative appeal alone could help build price strength, especially from the low historic level. Failure to get a partner at Bomono would be a further loss of trust in the board, a constrained work period in terms of time, and financial pressures - that's why I expect them to pull through. They can't really afford not to. The cost of the two wells is estimated at around $32m, so they could fund a minority share, even if that scenario is not optimal. In addition, under the Petrofac deal, Bowleven will receive ~£36m upon completion of the FID. If they meet the mid-2014 target, then funding pressures are relieved in the medium-term.

The key points to remember are that Bowleven still have a very good asset (recall the 15,000boepd+ flow rates from IM-5) and that they still have an excellent agreement with Petrofac. Indeed, broker Cenkos has noted: "if the market does not recognise the value soon, we think the industry will". Whilst I would not be so quick to agree (the Bomono issue is a stumbling block to a takeover bid), if they can clear all licence obligations (drill the two wells), receive the EEAA and complete the FID as per the revised timescales, then there is a very realistic chance that a larger company will table an offer for Bowleven. It's easy to forget that Bowleven were once at the heart of takeover speculation from Dragon Oil just a couple of years back, before they walked away.

The reality is that if they can meet these new targets, the share price will be driven significantly higher (barring a market meltdown). There is a certain feeling that any tangible progress from this level, and alleviation of uncertainty, will drive the price higher, quickly. Alternatively, if there is no tangible progress, then the shares could well drift lower towards the £100m market cap level (30.8p). I don't consider a takeover to be particularly likely at the current point in time, but if a takeover were to be tabled tomorrow, it's important to remember that the first takeover bids are substantially less than net asset values, and are often linked to share price premiums. Those premiums usually range between 50% and 100% for oil and gas companies, although it can be skewed by price action just before the takeover bid. An offer between 80p-100p/share would be the initial ballpark in my opinion. As before, more hurdles probably need to be cleared to pave the way for a takeover, if that is the company's preferred monetisation route. The company isn't standing still though as it has been awarded 3 exploration blocks in Zambia. A further farm down of Etinde may therefore be preferred and intended route.

The development plan for Etinde remains to tie in the IM, IF, IE and Sapele wells into an onshore development hub. Any success at Bomono could also be tied in. Importantly, significant undrilled upside remains, and that is what boosts the chance of a takeover. Bowleven does not have the cash resources (currently) to be able to pay for additional exploration wells. At Etinde, there are total estimated in-place Pmean resources of 1,591bcf and 273mmbl. Take note than oil has a much lower recovery factor than gas.

As I stated in the initial review, Bowleven was always going to be a long term opportunity, so after 6 months I'm not particularly concerned over the price action despite the significant decline. As with all mid-tier oil and gas stocks, the company is risky, especially since it operates in Cameroon. The risks are not governmental, funding (to a lesser extent than most due to the Petrofac deal) and of course, the oil price. Putting those issues aside, there is a robust discovered asset (263mmboe), strong upside potential at both Etinde and Bomono, and an impressive partnership to exploit the existing Etinde discoveries. There are plenty of potential catalysts in 2014, with FID, funding (debt is most likely), and drilling being the main ones. The technical position is slightly more positive than it has been, although there remains much work to be done on that front. Any improvement in sentiment towards the sector would also help. The wider outcome for Bowleven can be summed up in one sentence.

If Bowleven are not competent enough to progress the existing discoveries through to production, there should be larger companies willing to do so, at the right price.

UPDATE (31/03/14) - In light of a further share price decline, I have doubled up the site's stake in Bowleven on the premise that delays look to be coming to an end, and progress will support the share price. The average has thus been brought down to 40.25p

UPDATE (24/06/14) - Bowleven announced a proposed farmout deal of Etinde this morning, for a total value of $250m, with ~£100m of upfront cash. Whilst this deal provides funds for the Bomono drill programme and alleviates a lot of uncertainty, in addition to bringing on board LukOil, when looking at the details, the value crystallised is slight short of what I envisaged. It does however, vindicate the asset as commented in the review above, but may lead to institutions reducing their stakes if they don't deem it to have achieved fair value. In light of opportunities elsewhere in the sector, I have moved Bowleven to a No Rating tag at 46.00p for a 14.3% profit

17 comments:

  1. Thanks for reminding us what there is at stake. Easy to become too bearish!

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  2. Subscribed

    It is hard to believe that the share price is over 50% down from when dragon made the takeover scan. Its difficult to see what the Institutions are thinking also! Their share movements are all over the place.

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  3. Good report. Thanks.

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  4. Hello,

    I can't find a annual turn over of BLVN. Somebody now?
    Even if you have the 2012 one, i am very interesting.
    Thank's
    (Sorry for my English I am french)

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    Replies
    1. Hi Sebastien,

      If you are referring to financial turnover, Bowleven did not generate any revenues. It is purely an exploration company and the asset is in the ground, not yet producing, so turnover is zero. That is why the oil is valued very lowly.

      I hope that helps,
      El1te

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  5. Thank's you for your feedback El1te!

    Do you think 30/35gbx is a good oportunity?
    Do you have some objectives on BLVN? target Price, time?

    Have a nice Day,
    See you.

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    Replies
    1. Hi Sebastien,

      In the long term I think that it is a good opportunity, although the recent price weakness is of concern. The problem with companies such as BLVN is that they are badly affected by market weakness, and peer weakness. That can be seen today when it was taken down along with XEL and GKP. Therefore, it can be very unpredictable!

      I don't have specific objectives at present. Genuinely though, if I had funds, I woud hold off as I remain slightly wary over the state of the markets. The US indexes are overvalued I think, and that could drag back the UK indexes. Of course, do your own research to check!

      I must stress that all oil companies are high risk by nature, so seriously only invest what you can afford to lose a large chunk of, even if that is not likely. I'm happy to discuss this via email if you would prefer - just use the contact form tab. I can discuss in more detail there.

      El1te

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  6. Hi El1te, following your update on 31/03/14. What made you decide that delays may be coming to an end? At the shareholder meeting in Febuary, KH described the EEAA as 'imminent'. The SP has held well between a bottom of 29-31p three times now, what do you make of the current chart? Thanks

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    1. Hi there,
      The comment was based on Q2 likely being an active month for Bowleven with the news flow in the pipeline. The EEAA should arrive shortly, but clearly when working in Africa, timescales tend to be stretched! The current chart is actual very bullish as the base formed at 30p was created over a number of months. The price targets in the next 3 or so months, are 40p and 45p respectively. I'll continue to monitor the share price over that time - if no progress has been made on the EEAA over that time period, I will look to reduce the holding back down to the one slot
      El1te

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    2. Thanks for the reply! I thought the chart looked very bullish and has similar targets in that time frame, but my TA skills aren't exactly pro ;). Looking foward to seeing where the SP will go in the long term.

      Also a bit off topic, I would post in a review page if you had one on FAST, after the drop this week it looks rather oversold? Do you think it looks a promising short-term trade at 6p?

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  7. Hi any new thoughts on BLVN currently since it is now June already or is it just same as it was for you a few months back and you will wait a bit longer to see what happens??? Cheers

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    Replies
    1. Hi there,

      It was a wait and see mode, but today's announcement should go quite far in outlining the future.

      El1te

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  8. El1te

    What do you think of the muted response to EEAA?

    My view is its because I hold shares!!

    Regards

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    Replies
    1. I suspect the market is waiting for the formal ratification. The other burden lingering over BLVN is Bomono and that contingent liability so that needs to be shifted as soon as possible. Given the size of the liability, it would be best for BLVN to actually go ahead and drill the two wells, after thrashing out a farm-out agreement to give away a large slice of equity. The problem is that farm-outs seem to be difficult to get at the moment, and it could take a while to get through the government. This is the main issue though.

      If they can go ahead and drill, then the shrae price would actually rise from speculation, so it could be a win-win if they manage it right. Time is running out though, so they have to move very quickly. If they need to place £10m to fund the drilling by themselves (as a partner may not be possible), then this would still be preferable, as long as it's not at a major discount to the share price. Suttie may back a further raising given the EEAA is almost tied up. I suspect the Petrofac money can't be used to drill Bomono.

      El1te

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  9. Hi El1te,

    Any idea of COS for 2 Bomono wells?

    Thanks

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    1. I don't believe that Bowleven released COS figures for Bomono. At a guess, I'd say 18% to 28%, but that is just a rough ballpark

      Best,
      El1te

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