Next Contrarian Investor UK stock review for end February?

So I've done the following AIM company reviews since the start of 2011:

• Gulf Keystone Petreoleum (GKP) - http://contrarianinvestoruk.blogspot.com/2011/02/gulf-keystone-petroleum-interesting.html
• Xcite Energy(XEL) -http://contrarianinvestoruk.blogspot.com/2011/01/xcite-energy-should-prove-highly.html
• Range Resources (RRL) - http://contrarianinvestoruk.blogspot.com/2011/02/range-resources-look-to-have-good.html
• Weatherly International (WTI) - http://contrarianinvestoruk.blogspot.com/2011/01/weatherly-international-namibian-copper.html

Only Xcite Energy and Weatherley International have made it into the portfolio so far, though Range looked interesting.

I'd like ideas for reviews on AIM stocks outside the commodity area, since the Contrarian Investor UK portfolio is way too skewed towards oil and gas. Please comment with any ideas.

U.S. regulators recommend steps to prevent another Market Flash Crash

On May 6th 2010 U.S. Flash Crash the Dow Jones industrial average lost nearly 1,000 points in 20 minutes starting at 2.40pm (GMT-5). It finished the day down only 3% after losing nearly 10% during the Flash Crash when the market lost over $850 billion dollars in minutes. The Flash Crash caught out the Contrarian Investor UK portfolio given I had some Dow Jones index CFD positions which closed fortunately on guaranteed stops, but I still lost several thousand pounds that day.

A committee set up by the U.S. regulator, the SEC (Securities and Exchange commision), has said that 90% of all trading is now done by high-frequency computer driven trading and a third of all trades are related to ETFs (exchange traded funds), which can add to the lack of liquidity in a market during periods of excessive market volatility. During the Flash crash, sellers overwhelmed the market with sell orders and there were not enough buyers to soak up the demand.

To prevent another May 6th debacle, the committee has recommended charging high frequency traders higher access fees during peak hours, a “limit up/limit down” system that would allow stocks experiencing rapid declines to continue trading within a narrow range of prices and a ban on “naked access” by requiring that all direct access order routing to the market to occur through a registered broker.

The Times: Four rules to follow if you want to plunge into oil and gas

From TheTimes:  http://www.thetimes.co.uk/tto/business/columnists/article2919361.ece


Four rules to follow if you want to plunge into oil and gas
Martin Waller: Tempus
February 19 2011 12:01AM

When last our vessel approached the wilder shores of the oil and gas exploration sector, I did warn that these were choppy waters. These are shares much loved by private investors but not for widows and orphans, mostly. There are an unbelievable 87 oil and gas companies quoted on the Alternative Investment Market alone.

The City gossip mill suggests that there are a number of others eyeing a stock market float, encouraged by the surge in the oil price to above $100 a barrel since the start of the year. These include such exotica as 3Legs Resources, owned by the wealthy Jeffcock family of the Isle of Man, hence the name. This extracts gas from shale in Poland, the first time this controversial technique has been used in Europe. The company has lined up Tim Eggar, a former energy minister, as a potential chairman.

There are, as I see it, four ways of approaching investment in oil and gas. One is to go for the blue chips, companies that have been around and have proven reserves. You will not make a fortune out of these, but you may not lose one, either.

The granddaddy of the sector is Premier Oil, in the North Sea from 1971 and now active in Vietnam and Indonesia, ramping up oil production from 44,000 barrels per day (bpd) in 2011 to 75,000 bpd next year.

One of Tempus picks for 2010 was Northern Petroleum, a tiddler with reserves in the North Sea off the Netherlands. The shares are now trading, I am pleased to say, at 134¼p, 23 per cent above the price when I tipped them.


The second is to follow people who have a strong track record. Sir Bill Gammell is the former Scottish rugby international who founded Cairn Energy in 1980. Cairn is locked in an uncomfortable dispute with the Indian authorities over the sale of its Rajasthan reserves to Vedanta Resources, which would bring in a windfall of up to $9.6 billion. There is no guarantee that the deal will go through, but some analysts see this as a two-way bet. If Cairn is required to hold on to the asset, it will still be worth more than when the sale was announced in August. Angus McPhail, the veteran oil-watcher now at Investec, says that it is in the interests of the Indian authorities to allow the deal through, given their need for indigenous diesel fuel to power coal and iron ore production. Phil Corbett, at Royal Bank of Scotland, agrees: “Does the Indian Government really want to put a black mark over investment in India?”. Sir Bill wants to spend much of the money from Vedanta on exploring off Greenland. This is unproven territory, but his loyal army of investors would happily back him.

Also bogged down in local political issues is Tullow Oil, which is trying to sell assets in Uganda and only this week abandoned a well in Mauritania. The Ugandan deal has been delayed by the election there but, on the assumption that Yoweri Museveni is re-elected as president, the parties should go back to the negotiating table, Mr McPhail says.

The third approach is to plump for a region that, for geopolitical reasons, looks promising. There are several Western explorers in Kurdish Iraq again involved in a political dispute, including Heritage Oil, which this week disappointed investors with the discovery of gas, rather than oil, there. Heritage remains one of the sector’s possible bid targets.

In the Falklands, the stock market high flier Rockhopper also disappointed with a drilling report this month, having raised £206 million to fund further exploration in November. The company insists there are reserves near by; expect more news shortly.


The third area exciting investors is off Vietnam and Thailand. David Farrell, at Evolution Securities, likes Soco International, which should be producing 35,000 bpd in the not too distant future from two wells there. Mr Corbett also singles out Soco, whose assets alone support the share price, with unproven exploration in the Democratic Republic of the Congo probably thrown in for free.


Soco is another bid candidate. “Historically, this is a company that has been looked at by potential predators,” Mr Farrell says. Last year Dana Petroleum was bought by the Korea National Oil Corporation for £1.9 billion, after a hostile takeover battle. KNOC still plans to spend £3 billion or more on acquisitions, while its Chinese equivalent is equally deal-hungry.

Mr Farrell’s colleague, Richard Griffith, likes Cove Energy. This is partnering with Anadarko Petroleum, one of the biggest oil independents in the world, in offshore Mozambique, and there are further opportunities further north off Kenya.

Dana’s founder Tom Cross believed the deal undervalued the company, and the rise in the oil price suggests he may have had a point. Mr Cross is back as chairman of Parkmead, an AIM-quoted penny share that typifies our fourth investment strategy in oil and gas stocks, the wildcat stock pick. Latching on to a company with little in the way of assets is an easy way to make money if you choose the right one, but it is a lottery, even if it is linked to someone with a track record such as Mr Cross. The shares have rocketed since he joined, and Parkmead still has much to prove.

Portfolio review of the week - 19th February 2011

Despite continued violence in Bahrain and an increase in Chinese interest rates to curb inflation, the FTSE 100  ended only marginally down at 6,083, a decline of 4 points giving a 20 point or 0.3% rise over the week.  The Dow Jones Industrial Average  rose 73 points, or 0.6%, to 12,391 its highest close for two and a half years.The Nasdaq rose 2, to 2,834, its highest close since October 31, 2007.

Violence is escalating in Bahrain between Sunni Muslim rulers and its Shiite majority population. Though ICE Brent for April was slightly lower at $102.52, after trading from $100.73 to $103.50. WTI U.S. crude finished at $86, down 0.2%.

Despite a strong oil price this week, the Contrarian Investor UK portfolio has suffered a second week of weakness. Its been a week of selling as I have de-leveraged on Xcite Energy (XEL) and sold my stake in Angel Mining.

Xcite Energy (XEL) - Xcite lost 29p or nearly 8% this week to finish at 353p as rumours continue to grow of a fund raising at around 350p to accompany the CPR (Competent Persons Report) which will move contingent resources to proven reserves and allow field development to begin. Though the CPR is expected to be positive, giving reserves of 225-250 million barrels of oil for the Bentley field, at least £200 million in shares is likely to be placed with institutions. With the price spiking to close to 400p last week on takeover rumours and with the likelihood of share price weakness, I took the opportunity to sell some of the holding to allow funds for acquisitions of other shares in the case of a market fall.

Bowleven (BLVN) - Bowleven dropped yet another 3.2% this week with news from the Sapele 1 side track several weeks away. At 318p, this appears bargain basement given the resources already discovered in Cameroon but sales by the BT Pension fund have helped move down the price. Frustrating given the upside potential in this share and it is now 9p below the last placing in October 2010.

Rockhopper (RKH) - Rockhopper dropped another 5% this week with the impact of the market disappointment from the 14/10-3 North Falklands basin well still being felt. The spudding of 14/10-4 which is much closer to the SeaLion discovery is due any day.  On fundamentals Rockhopper now looks very cheap. Its market capitalisation of £682 million, means that with £200 million in the bank deducted, Sea Lion's 170 million barrels are valued at just over $4 a barrel with no upside whatsoever. 14/10-3 is likely to add 40 million barrels to the discovery alone. Painful to be down on this one, but I believe patience will be rewarded and buyers will return with 7 wells yet to be drilled and a high COS (probability of success) on the new well.

Angel Mining (ANGM) - I lost patience with Angel Mining after we went into the 3rd week of February with no news from their Nalulaq gold mine. In my view no news is bad news, so I sold. Good long term prospects but things are very tight on cash flow and the last thing investors need is a cash call or increase in the SEDA (equity drawdown agreement).

Weatherly International (WTI) - Good to see copper miner Weatherly bounce on Friday to 12.4p (but still 5% down on the week) on news that Blackrock Smaller Companies has built a 7% share. This doesn't surprise since the constantly widening spread seemed to indicate the the market makers were playing some sort of game to accomodate some large block buys. Its good to see Blackrock involved to a greater extent a long with Gartmore as production ramps up in this really exciting Namibian copper company.  I am sure that we won't be seeing 12p for long with Copper at record highs and so much news to come from WTI in the coming months. I put a big slug into my SIPP pension plan earlier in the week because the risk/reward was excellent at less than 12p.

Warren Buffett's tips for investment success

As an avid Buffett and Berkshire Hathaway follower, I try to remember his investment advice which has served him well. If readers are wondering why I took the decision to top up on Rockhopper (despite its relatively high risk profile) and sell some Xcite (despite my liking of the company and its excellent prospects), please see points 1 "stay liquid", point 2 "buy when everyone else is selling",  point 7 "defense beats offense" below. 

As another of my investment heroes Jim Cramer also says, "diversify, diversify, diversify". I am failing badly here, too many oil and gas stocks and too much in Xcite Energy. But I have known this for some time, and hence taking exit points when they arise on Xcite. Though I am in loss positions on both Rockhopper and Bowleven  (though made some profits on both in earlier sales in 2011), I won't be selling these at a loss. The fundamentals still justify an investment on a risk versus reward basis. Lets not forget that Buffett was buying preferred shares in Goldman Sachs in 2009 when everyone else on Wall Street wouldn't touch the sector and for his risk he got an 8% coupon! This is the contrarian style of investing that I favour....and sometimes its damned hard being a Contrarian when the momentum is the other way.

Extract from March 2010 post (http://contrarianinvestoruk.blogspot.com/2010/03/warrne-buffets-berkshire-hathaway-shows.html).

Buffet’s advice for investment success is :

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."
Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend ... Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Mr. Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.
Value, value, value. "In the end, what counts in investing is what you pay for a business-through the purchase of a small piece of it in the stock market-and what that business earns in the succeeding decade or two."
Don't get suckered by big growth stories. Mr. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be.". Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?
Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Mr. Buffett wrote.
Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue." All timely advice from Mr. Buffett for turbulent times.

(original source: marketwatch.com)

Derisked holding in Xcite Energy

The word in the City is that the Xcite's CPR is due any day and its positive. No need to re do the flow test that's for certain. The directors aren't so stupid to sign for the Rowan Norway rig with that sort of scenario.
But the rumours of a placing to accompany this news is building. Somewhere in 350p region seems to be consensus, but i hear talk of less. I sold a little more on the spike up this morning, to diversify the portfolio more. Still love the Xcite story but no point taking a big hit. The institutions aren't handing out cash like they were and want a big discount. The number of commodity flotations pulled in the last 2 weeks underscores the weakness in the market for new listings and placings. I am hoping that the Bentley Alliance route is used rather than institional money but details are vague here. I'm taking a cautious approach and this may be nothing more than a "storm in a teacup". 

Finally some common sense on Rockhopper

I was talking to a guy yesterday who knows one of the brokers that did the last Rockhopper placing and he was saying that 14/10-3 was a duster. Now quite rightly I said actually there was live oil and it was right at the northern lobe 8km (5 miles) from sea lion so the COS was always going to be on the low side. To say it was duster was wrong, wrong, wrong. Just too small to be commercial on a standalone basis but it does add to the Sealion recoverables. If a broker was getting it wrong, what does it say!!??
Fortunately the offshore magazine article (link below) on Rockhopper puts things nicely into context that 14-10/3 was a discovery, but small. 14/10-4, the next appraisal well much closer to the Sealion discovery has much better chances of a good hydrocarbon show. When it went below 260p this morning it was crazily cheap and I had to buy more. Have far to many, but sometimes in life there are risks, and there are educated risks. This is the latter, a no brained, with enough cash for 7 more wells. It's up 5 percent now so the markets have now decided the madness must end.

http://www.offshore-mag.com/index/article-display/2367306901/articles/offshore/drilling-completion/latin-america/20110/February/sea-lion_delivers.html

First Energy initiates Xcite Energy coverage with £5.10 target

http://www.firstenergy.com/research/documents/Focus-C-XEL_LN-2011-02-15.pdf

Some key highlights:

• Outperform rating and £5.10 12 month target
• Large Resource Base with Significant Upside: Xcite holds 200 mmbbl in contingent resources (company estimate). Following the award of the 9/3c and 9/3d blocks during the 26th UK licensing round, Xcite also has 207 mmbbl in place of potential low cost tie-in upside. We currently carry no value for these tie-in assets in our target price but believe that over time these assets could contribute up to £3.95 per share to the current share price.
• produce in excess of 15 mbbl/d, with first production as early as Q4 this year or early 2012. This could generate US$197 mm in cashflow for Xcite in 2012, increasing to US$416 mm by 2013.
• Given the size of the project we anticipate Xcite will need additional funding. We have used a 50% equity  financing (for FPS towards first production) and 50% debt financing (post first production of the FPS) for the project, anticipating that Xcite will need up to US$399 mm in additional funding.
• In February 2009, RPS Energy published a CPR for block 9/3b, assigning contingent resources development pending to the fi eld with a probability of commercial success of 70% and base case resources of 122.5 mmbbl. Subsequent to the CPR, based on reprocessed 3D seismic, Xcite has shown the Bentley East feature to be part of the overall Bentley field. The Bentley field now includes a second drill centre to the south to access Bentley East and the southern areas of the field, thereby adding approximately 40 mmbbl to the base case resources. The horizontal 9/3b-6z well also encountered significant thicker sands than previously anticipated. The thickness of the reservoir was anticipated to be 72ft thick but instead proved to be 114ft. Furthermore, the net to gross rate of close to 100% also supports this case. Bentley is supported by a 400ft underlying water driver, although an electrical submersible pump will be needed to achieve commercial production rates.
• The first phase of the development involves five wells on the Bentley field and includes a two to three year pilot production facility that could produce approximately 15 mbbl/d from these five wells, and following the successful flow test, Xcite hopes to be able to book between 20 to 30 mmbbl of 2P reserves through this well, which it aims to confirm through a reserves report in the first quarter of this year.  The RPS report in 2009 that determined 120 mmbbl (P50) resources with a low to high range (broadly equivalent to P90 to P10) from 109 to 220 mmbbl, assumes conventional, cold flow recovery, utilizing pumps to lift the oil. There is considerable up-side in the field through application of enhanced oil recovery techniques, which has the potential to double the recoverability.
• Development drilling will continue to increase production which we expect to peak in 2018 at 65 mbbl/d, which we feel could be conservative as this is only marginally above the previous base case scenario which was based on 120 mmbbl contingent resources.
• We have projected early cashflow from the FPS of US$1.1 billion funded by a US$190 mm equity raise in early 2011. We have assumed the shares will be priced at £3.50 per share.
• The UK government’s recent fi scal changes in favour of heavy oil assets will allow Xcite to claim up to £800 mm in tax credit spread out over five years. We expect the Company will not pay any tax until 2017

Dual listed U.K. commodity shares and therefore ISA elligible

The following dual listed shares can be included in a U.K. ISA (individual savings account) and hence any gains will be free of CGT (Capital gains tax).

Bowleven below November placing price

Back in late November last year Bowleven (BLVN) successfully placed 22 million shares at 327p in record time. So at today's 325p we are below the placing price. The share price has slipped in recent weeks as JP Morgan and the BT pension fund have been offloading some of their stake (an RNS re BT's stake was released yesterday) presumably to derisk their portfolios with the significant share price increases in 2010.

But plenty of news to come in the coming months including the flow test results from the tertiary Sapele-1 sidetrack in the next 6 weeks or so.

Bowleven Stockpedia write-up gives good reasons for investment case

From stockopedia.co.uk : http://www.stockopedia.co.uk/content/bowleven-plc-assessing-the-investment-case-53668/

Bowleven Plc: assessing the investment case

Sunday, Feb 13 2011 by marben100

I first came across Bowleven (LON:BLVN) , as a potentially interesting investment, at the Oilbarrel Conference in Sep 2010. [1] What made it interesting to me at that time was:

• A strong management team, with key players being ex-Cairn [2] [3]and ex-BG [4]
• A decent cash position & sound, tested assets [see "Assets"]
• Partnership with a big player, in the shape of Vitol [see "Vitol Agreement" below]
• Lots of potential upside from drilling, with the major Sapele-1 well due to spud shortly

Against that, I had to balance the political risk of operating in Cameroon and risks associated with commercialising existing discoveries, meaning that they can currently only be classed as "contingent resources", as opposed to 2P reserves. Anyhoo... I decided to take a punt in October 2010 when, despite Sapele-1 having already spudded and initial results being expected soon, the share price had remained remarkably subdued. That proved a good decision with my original punt having now double-bagged.

Long story short, I believe that the market has misunderstood the company's latest RNS concerning the Sapele-1 well and that there may be considerable excitement to come - hence I have topped up today (Wednesday 9th Feb), with the SP well off its recent peak. AIUI one rig is standing by, waiting for government approval to sidetrack Sapele-1, in order to appraise a Tertiary oil discovery made in the original well and another, more capable rig, is on its way. That rig will drill a step-out well into deeper, more "challenging" Cretaceous prospects.

Lots more drilling is expected over the course of 2011 with those rigs, and Bowleven has the cash to fund it.

I will start by discussing the Sapele-1 well and then come back to discuss already tested assets that (at least to some extent) underpin Bowleven's current market cap. of £716m, irrespective of Sapele-1 results.

Sapele-1

Well/News Timeline

Sapele-1 is the second well drilled by Bowlen in its shallow-water MLHP-5 Block offshore Cameroon (75% equity interest). The first, D-1r well in 2007 made a gas-condensate discovery, flowing 25mmscf/d + 1,400bopd condensate in the Tertiary horizon. Following 3D seismic acquired during 2010, Sapele-1 is designed to intersect multiple prospects in both Tertiary and Cretaceous strata. It was spudded on 14th September 2010 [5] .

• On 9th November, Bowleven announced two Tertiary discoveries [6] .
• On 25th November, an increase to the discovered Tertiary net pay was announced [7] .
• Following a strong SP rise, Bowleven placed 22m shares @ 327p (11% dilution) raising ~US$110m and securing ample funding for the 2011 explo programme on 26th November [8] . Shrewd move. ;0)
• On 10th January, Sapele-1 reached a TD of 4,529m in the Cretaceous. A gas-condensate discovery in the Cretaceous and a STOIIP estimate for the previously intersected Deep Omicron Tertiary target of P90 65mmbbls - P10 430mmbbls were announced [9]  .

During this period, the SP rose fairly steadily from a base of around 160p, peaking at over 400p. It appears that there was some disappointment with the last announcement, probably due to the relatively thin pay in the "Cross-cut" objective and the Cretaceous (so far) only yielding gas-condensate and not oil, and the SP has subsequently declined.

Then, this Monday 7th February, Bowleven released the following announcement [10] :

Bowleven, the West Africa focused oil and gas exploration group traded on AIM, announces that the Sapele-1 exploration well drilling in the Douala Basin, offshore Cameroon has been drilled to a total depth (TD) of 4,733 metres.  Drilling was halted due to technical limitations after encountering a high pressure gas reservoir in the Cretaceous. The bottom hole section has been cemented and is now being abandoned in advance of planned appraisal drilling.

Update

· Oil, condensate and gas confirmed as present in the Cretaceous and the well may now have encountered a significant hydrocarbon column at TD.

· Proposed forward plan includes appraisal drilling and well testing to further evaluate Tertiary discoveries.

· Additional rig secured for drilling up to four wells on the Etinde Permit; expected on contract towards end February 2011.

Drilling update

The Sapele-1 well location was selected to intersect multiple independent exploration targets from the proven Tertiary fairway down to the deeper Cretaceous fairway from a single location.

On 10 January 2011, Bowleven advised that further Cretaceous targets had been identified beneath the original planned target depth of the well (4,450 metres) and the plan was to deepen the well.  The well was drilled to a TD of 4,733 metres before drilling was halted due to a rapid influx of very high pressure gas.  Consequently, logging of the interval was not possible and the bottom hole section is being abandoned.  Based on an initial analysis of the major step change in pressure encountered and the interpretation of the seismic, it is considered that the well may have encountered a significant hydrocarbon column in the Cretaceous.

Further analysis of mudlogging and wireline data, together with gas chromatograph ratio analysis, has confirmed oil shows were encountered within thin sands in the upper part of the Cretaceous Epsilon Complex.

Further interpretation and calibration of the well and seismic data is required to assess fully the implications for Cretaceous volumetrics...

The market didn't seem to like this much at all, and the SP has continued declining since, now standing at around 333p.

It is possible, however, that the market has got it wrong. Firstly, judging by comment I have read, including those by some analysts, "high pressure gas influx" has been widely interpreted as meaning that the well has just found gas in this deeper Cretaceous section. However, as those of us that followed the sad Macondo saga know, a high pressure gas influx doesn't necessarily mean that there isn't oil there too!

Considerably more detail/information is contained in a presentation [11]  that Bowleven gave at a Credit Suisse energy conference, the same day as the announcement. This includes diagrams that help to understand the well context and sequence. However, the most interesting information was in an analyst/investor conference call that Bowleven held and which I highlighted here.

Analyst/Investor Teleconference

I took the following notes from the telecon:

• All targets confirmed hydrocarbon bearing
• Tertiary “unequivocal”
• Lower Omicron gas-condensate 20m net pay 290bcf GIIP
• Deep Omicron oil 20m net pay 21% porosity 217mmbbls OIIP P50 estimated
• Gas condensate in base of Cretaceous Epsilon Complex 4m net pay 13% porosity
• Deeper potential – intended to drill on
• Since established (from logs) that there was oil in thin sands in upper Cretaceous Epsilon Complex, more work needed (encouraging)
• Beneath Epsilon, cemented liner, drilled on in 6” hole to 15,529’ – extreme pressure found resulting in kick. Bottom hole pressure calculated as 15,180psi, step change of 4,500psi from previous value – extreme HPHT.
• V pleased with outcome to date but unable to log bottom section properly
• Major cement needed downhole to control well after this, so impossible to perforate Deep Omicron. Significant flow expected from Deep Omicron, given quality of logged reservoir sands.
• Intend to sidetrack to location 2km from current well to appraise Omicron with current rig. In talks with Cameroon govt at present to agree this.
• Intend to test Cretaceous downdip, 7-8km step-out, with new, more capable, rig as its first task.
• Sidetrack will take 50days from start (once govt agrees & ops restart)
• Cretaceous step-out expected to be 60 day well.
• Believe acreage may be a fairway - need to demonstrate connectivity. "May have a tiger by the tail."
• Considerable interpretation work to be done to determine further drilling locations.
• Will be expecting extension to licence beyond 2011 to allow for appraisal period.

My key "takeaways" from this are:

• We have an excellent discovery in the Deep Omicron target, maybe ITRO 100mmbbls recoverable, plus a "bonus" gas volume in the shallower target.
• In this well, thin oil-bearing sands were discovered in the Epsilon Complex. If MLHP-5 contains a "play fairway", as hypothesised, they may be thicker at a different location
• The 4,500psi step change indicates something very serious going on in the deep Cretaceous (below Epsilon Complex). There were clearly serious well control problems, given the need for emergency cementing to kill the well.
• Given that the deeper Cretaceous section couldn't be logged properly (due to the well control issues), we don't know what hydrocarbons are present there.
• A 7-8km step-out downdip is a very interesting prospect. I presume that by going downdip, they are more likely to encounter oil (or water!), as gas/condensate will tend to migrate updip? Moreover, if they DO find oil 7-8km away it adds strong weight to the connectivity/play fairway theory and we'll have a very exciting discovery on our hands.
• If the "fairway" theory is correct, Bowleven may have acreage holding prospects much larger than analysts are currently gving credit for.
• Exciting drilling should start and be announced soon: the sidetrack to flow test the Omicron targets is just awaiting government approval, so could be announced any time. The other rig seems likely to arrive and spud the stepout well next month (but I think 60 days drilling time is optimistic, given the HPHT issues - hope it doesn't turn into another TGD!).

So, for the traders amongst us ;0), we should have drilling resumption/spudding news soon that may reinvigorate the SP. The upside here, if these wells are successful, is potentially very large: a recent Evolution note puts the upside at around 800p/share (i.e. over 1150p overall SP). From the presentation, drilling in MLHP-5 is planned throughout 2011 (5 wells, including the Sapele-1 sidetrack), so Bowleven have a good chance of finding/delineating whatever oil/gas there is in the block.

Assets

As I've said, the upside is potentially very large. What about the downside protection?

Cash

For a start, we have ~$190m in cash as at 31st December (88p/share) - but, of course, this will be eaten into heavily by the intensive 2011 drilling programme.

EOV

From the annual report (dated 8th November 2010):

Gabon – EOV Permit

Following the initialling of an SPA last year for the

disposal of the Group’s entire interest in the EOV

Permit, offshore Gabon, the focus for the current year

has been engaging with the various authorities in Gabon

to formalise the disposal. Progress has been made and

completion is anticipated within the next six months.

Proceeds expected include a cash consideration of

$35 million and a working capital adjustment from

the effective date of the transaction.

So, that should be another 16p/share.

Etinde Permit

This comprises blocks MLHP-5, -6 and -7, all shallow water offshore Cameroon.

Bowleven has already made several discoveries in MLHP-7 (see slide 15 of the Credit Suisse presentation). These total 959bcf of GIIP, 119mmbbls of NGLs (condensate) IIP and 232mmbbls of STOIIP. These are subject to appraisal, scheduled to begin in Q2 of this year. The slide also shows unrisked potential upside in that block of a further 2Tcf of gas and 91mmbbls of condensate IIP.

The annual report claims Pmean contingent recoverable resources of 494bcf of gas, 30mmbbls of condensate and 72mmbbls of oil (net of Vitol's interest - see below). These resources remain contingent until a clear route to commercialisation is established. Clearly, the more hydrocarbons Bowleven find at Etinde, the stronger the chances of commercialisation. Bowleven's appraisal effort, in conjunction with Vitol, is designed to establish commerciality. Note that GdF is studying LNG feasibility for other existing Cameroon gas discoveries.

Given the contingent nature of the resource and the impact of political risk in Cameroon, I would put a low figure of $8/bbl on the value of oil & condensate - and, for simplicity let's disregard the gas entirely. Any views/comment on my choice of that figure welcome! That still yields $816m of current value - but with risk attached in the (not very likely, IMO) event that commerciality is not proven.

In addition to this, the Sapele-1 Deep Omicron discovery alone could add a mean recoverable resource of around 60mmbbls of oil (using 30% recovery factor), subject to forthcoming appraisal - maybe another $480m.

So, a successful appraisal of these discoveries would lead to around $1.3bn of value = 376p/share.

Bomono Permit

This comprises two blocks onshore Cameroon, with a 100% W.I. Evaluation and further 2D seismic acquisition is ongoing. Drilling is planned for 2012. I'm not assigning any core value here.

Epaemeno Permit

This comprises two blocks onshore Gabon, with a 50% W.I. - the other 50% having been farmed out to Addax (now owned by Sinopec). Drlling is planned for 2012. No core value assigned.

Summary

Subject to successful appraisal and commercialisation negotiations, ISTM that the current SP is pretty well underpinned by discoveries already made.

Vitol Agreement

Vitol is one of world's largest energy trading companies ($143bn revenues in 2009). In June 2010 Bowleven successfully completed a farm-out agreement with Vitol over the Etinde permit [12] .

Bowleven, the West Africa focused oil and gas exploration group listed on AIM,

is pleased to announce that the Etinde Permit (Etinde) farm-out transaction

entered into with Vitol E&P Limited (Vitol) has completed.

The farm-out transaction announced on 12 August 2009 comprises the acquisition

by Vitol of an initial 25 percent interest in Etinde in return for funding a

$100 million gross work programme. Vitol also has an option (exercisable on or

before 30 September 2010) to acquire a further 25 percent interest in Etinde in

return for funding a further $100 million gross work programme and paying $25

million in cash to Bowleven to progress Etinde activities.

Clearly, Vitol's interest is a substantial indication of interest in Etinde - though it coud be taken as implying a value of only $300m for Bowleven's interest - but that was before the Sapele-1 well confirmed the prospectivity of block .MLHP-5.

On 1st October, Bowleven made the following self-explanatory announcement [13]  regarding the option mentioned above:

Bowleven, the West Africa focused oil and gas exploration group listed on AIM,

is pleased to announce that it has entered into a revised option agreement with

Vitol E&P Limited (Vitol) in respect of the Etinde Permit (Etinde), offshore

Cameroon.

Under the agreement, which replaces the previous option arrangement, Vitol have

an option to acquire a 10 percent participating interest in block MLHP-7,

Etinde, in return for funding an agreed $50 million gross appraisal work

programme. The option expires on the earlier of (i) the spud date of the next

appraisal well on block MLHP-7 or (ii) 31 March 2011. The option arrangement

excludes blocks MLHP-5 and MLHP-6, Etinde, where the Sapele-1 exploration well

is currently being drilled. Bowleven will retain operatorship of all three

blocks.

The nature of the option and its applicability to only block MLHP-7 reflects

Vitol's primary focus on appraisal and development activities and the

understandable requirement for further technical work to be completed prior to a

firm future development and appraisal plan being agreed on the IE and IF field

areas. In this regard, work is ongoing integrating the results of the recent

IE-3 appraisal well and on the processing and interpretation of the newly

acquired 3D seismic over the IF field area.

Bowleven and Vitol currently have participating interests of 75 percent and 25

percent respectively in the Etinde Permit. In the event of option exercise,

Bowleven's participating interest in block MLHP-7 would be 65 percent with

effect from the date of exercise, with its participating interest in blocks

MLHP-5 and MLHP-6 remaining at 75 percent. All participating interests are

expressed prior to the exercise of any state back-in rights...

Note that the option only offers additional rights in block MLHP-7, not MLHP-5 where Sapele-1 was drilled.

Political Risk

I have to say that IMO the poltical risk is considerable. Cameroon ranks as #146 out of 178 countries in Transparency International's Corruption Perceptions Index [14] , the same ranking as Haiti, Libya and Iran (amongst others). The current "authoritarian" regime has been in power under President Paul Biya since 1982. He is now 78 years old. ISTM that in the event of "regime change" there is a risk of PSAs being ruled invalid. However, there is no reason to expect imminent regime change. So, I am pleased to see Bowleven aiming to prove up their licences ASAP. I would not want to hang around as an investor during a lengthier development phase.

Conclusions and Summary

Bowleven has an exciting imminent (if you'll excuse my use of that word!) exploration programme. Results could be well in excess of current analyst expectations (Evo, for example, puts the unrisked upside in MLHP-5 at 336mmboe, gross resource, which I think is low - potentially). Geological and political risks remain, however, so IMO it would not be wise to "farm bet" this one, even though there is some decent asset underpinning, but a modest holding could be highly rewarding.

Readers will note that I have not attempted a full risked EV for Bowleven - I'll leave that to the professional analysts. This is not simply laziness but also because such analyses can appear to give a spurious accuracy to highly inaccurate numbers. CoS is a highly inexact science - and when you add in commerciality risks (which include judgement on politics and future commodity prices) things can really get silly. Senior oil industry executives that I've spoken to and respect highly (I'd better  not mention names, as I wouldn't want to upset their relationships with the analyst community ;0) - but I am not talking about Bowleven's executives) are very scathing about the validity of such analyses.

The bottom line is that you have to make your own judgement of risk vs reward.

Regards,

Mark

Disclaimer:

The author may hold shares in this company, all opinions are his own and you should check any statements that appear factual and not rely on them before making an investment decision. The author is NOT a qualified analyst nor authorised to give investment advice.