Earlier this year I suggested taking profits on half your holdings in Africa-focused oil and gas exploration group Bowleven (BLVN:30.5p), a constituent in both my 2016 and 2017 Bargain Shares portfolios (at 18.9p and 28.9p, respectively). In the event the share price continued to rally to a four-year high of 40.5p, thus offering ample opportunity to de-risk the investment (‘Hitting pay dirt’, 9 April 2018).
It paid to take some cash off the table because the appraisal drilling campaign by operator New Age on the Etinde offshore prospect, Cameroon, in which Bowleven holds a 20 per cent equity interest, failed to make an additional commercial discovery with its first well, IM-6. Analyst Daniel Slater at brokerage Arden Partners notes that “the result has a knock-on effect on the size of the next planned well. IM-7 had been targeting 1.3 trillion cubic feet (tcf) of additional gross wet gas (we assumed 0.856tcf recoverable), but this is now being replaced by a well (IE-4) targeting a lower 0.2 to 0.6tcf, and across three different sand packages (not all of which are being drilled, but are seen as similar). This makes the second well less material as a catalyst, and less potentially helpful for progression of Etinde development”.
Mr Slater adds: “There are the implications for Etinde development overall. The purpose of the appraisal programme is to let the joint venture know where it stands in terms of development project options, and help it make a final investment decision (FID). The existing gross 2C resource of 290m barrels of oil equivalent (boe) may well not be enough to support a standalone floating liquefied natural gas (FLNG) project (although there remains some uncertainty here) and, given the change in target size, the result of IE-4 (the next appraisal well to be drilled) is not likely to significantly change discovered resources.”
It’s quite possible now that the only export option could be to supply gas to another LNG project, potentially the Golar Hilli vessel being used on Perenco’s Sanaga field in Cameroon. However, this could be complicated as the Cameroon government has stipulated that 500bn cubic feet (bcf) of gas be reserved for domestic supply.
Not surprisingly, Bowleven’s share price dropped on the drilling news, falling from 40p to 30.5p, albeit its forecast cash pile of $80m at the end of June 2018, a sum worth 19p a share, limits further downside, as does the company’s entitlement to a $25m (£19.4m) payment from its partners on achieving the FID at Etinde. Net funds and the FID payment equate to 25p a share, suggesting little value is being attributed to the proven 2C resource of 290m boe at Etinde, especially as Bowleven has a $39.6m (£30.7m) net drilling and testing carry to cover its share of two appraisal wells on Etinde, so effectively has a free carry. Also, activist shareholder Crown Ocean Capital controls 29 per cent of the share capital, and has strong board representation, so is heavily incentivised to minimise Bowleven’s cash burn and maximise the realisation of shareholder value from the company’s assets.
So, with Bowleven's cash-rich shares trading on less than half Arden’s risked net asset value of 65p a share, and heavily oversold – the 14-day relative strength indicator is in the mid-20s – it makes sense to await news from the second appraisal well. Run profits.
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