Africa-focused oil and gas exploration group Bowleven (BLVN:13.5p) has updated shareholders on the progress being made at its flagship Etinde offshore gas prospect, Cameroon, in which the company holds a 20 per cent equity interest. The operator is NewAge and Lukoil is the other partner in the joint venture.
The short-term focus is to complete the review of the field development options during the first half of 2019. At the same time, the partners have also contracted a number of consultancies to undertake engineering design studies across a range of development options. Bearing this in mind, they believe the economic value of the Etinde field lies in the condensate and light oil resource base. However, the volume of wet gas (natural gas, liquefied petroleum gas (LPG) fractions and CO2 content) fraction is significant with proven and probable resource of 1 trillion cubic feet in place, so the feasibility of any commercial development will depend on how the gas fraction is utilised.
Bowleven’s management team considers that the most likely commercial development will be based around liquid sales alongside a mixture of domestic gas supply (for electricity generation in Cameroon) and export liquid natural gas (LNG). The LPG component of wet gas would also be sold domestically or for export depending on how and where gas processing occurs. Commercial discussions with potential gas off-takers are running in parallel to the development planning.
In terms of a likely time line of newsflow, expect a final investment decision (FID) on the project by late 2019 or early 2020, at which point Bowleven will receive a $25m cash payment from its joint-venture partners under the terms of the original farm-out agreement. After taking into account the payment to shareholders of a special dividend of £48.5m, or 15p a share, in February this year, Bowleven currently has net funds and financial assets of $15.6m on its balance sheet. This means that liquid resources and the outstanding FID payment back up almost three-quarters of Bowleven’s market value of £43m. Effectively, Bowleven’s 20 per cent stake in Ethinde is in the price for $17m (£13m), a massive discount to the $214m value of exploration assets on its balance sheet.
Of course, nothing is ever certain in oil exploration, which is why, having included the shares in my 2016 Bargain Shares Portfolio and 2017 Bargain Shares Portfolio (at 18.9p and 28.9p, respectively), I advised banking profits on half your holdings, at 33.75p, 12 months ago (‘Hitting pay dirt', 9 Apr 2018). Taking into account the subsequent receipt of the 15p a share special dividend, this means that investors who backed the company in my 2016 Bargain Shares Portfolio have banked cash equating to 129 per cent of their original investment, so have a free ride on the balance of their holdings, which are worth a further 35 per cent of the original capital invested. On the same basis, investors who followed my advice in my 2017 Bargain Shares Portfolio have banked cash equating to 84 per cent of their original investment and retain shares worth 23 per cent of the capital they first invested.
So, if you have been following my advice, I would continue to run profits on the balance of your holdings given that Bowleven still has potentially a highly valuable asset in Etinde, albeit the FID has taken longer than I originally anticipated. Indeed, analyst Daniel Slater at brokerage Arden Partners has a risked net asset value per share of 50p (98p on an unrisked basis) based on a long-term liquid oil price of $65m a barrel and gas price of $3 per 1,000 cubic ft (mcf). Run profits.
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