Portfolio review of the week - 5th March 2011

After being in positive territory for much of the day, the FTSE 100 fell back towards the close as the DOW Jones moved firmly into the red. The FTSE 100 closed down 15 at 5,990, down 0.2% on the week. The Dow Jones Industrials finished down 88 at 12,170, but still up 0.3% on the week.

Rising crude oil on continued turmoil in Libya worried investors. WTI (West Texas Intermediate) crude moved close to $105 a barrel (up 6.7% on the week) and Brent Crude moved above $116 a barrel as reports came in that that clashes between Gaddafi's forces and rebels were occurring at the Ras Lanuf, a major oil terminal, in Libya. On a positive note, the U.S. unemployment rate dropped to 8.9% in February, the lowest rate in almost two years, with the addition of 192,000 jobs. But investors are concerned that corporate earnings growth may be curtailed by the extraordinary rise in the oil price in recent weeks. It seems likely that the U.S. Federal Reserve will maintain low interest rates to maintain economic growth despite concerns about inflationary pressures. 

It has been a week of fairly heavy trading in the Contrarian Investor UK portfolio as I have tried to free up funds to take advantage of the plunge in the share price of Xcite Energy mid-week to around the £3 mark, which was a buying opportunity not to be missed. I sold some Sirius Minerals (fortunately at the week high) and my Encore Oil position to fund Xcite. Overall a much better week after an awful February, with the market seemingly wanting riskier stocks in AIM again after weeks of selling off.

Xcite Energy (XEL) - Xcite had a great finish to the week, closing at 339p, up 8.5p on the day. On Wednesday the shares flirted with the £3.00 level on false rumours that the forthcoming reserves report was being "fixed" and that the flow test completed in December was flawed. It was a classic "bear raid" with the shares being pushed down by the market makers. On Thursday we saw the inevitable bounce and after buying heavily on the dip, I took some profit yesterday. I have tucked a good chunk away in my SIPP (Self Invested Personal Pension) at £3.01, since with production only 10 months away (at 15,000 barrels a day), this share will be going 2-3 times higher I am sure. In the medium term (i.e. less than a month) we are likely to see the Reserves Report and then the CPR (competent persons report). A great lesson for investors not to get spooked by nonsense rumours on the bulletin boards. Be sceptical of anyone, even if they appear "in the know".

Encore Oil (EO.) - Though the North Sea explorer announced it had spudded two wells this week, I have sold my position in Encore on Friday at a profit to increase my holding in other portfolio stocks, notably Weatherly International. I believe Encore is a great stock to own, but having analysed the current market capitalisation, exploration upside is needed to drive a further appreciation in the share price i.e. the oil finds to date support the current share price, but there does seem to be a big discount. I will buy back in on any weakness since its drilling prospects look enticing. 

Weatherly International (WTI) - A bit of a sell of in Namibian copper producer, Weatherly, late in the week meant it was time to increase the holding. With over 4000 tonnes of copper due to be produced by the company this year (with a selling price of over $9000 a tonne), revenues will begin to increase significantly in the second half of the year. In addition there is considerable upside from projects due to come on stream within the next 18-24 months. I am struggling to see why WTI is not significantly higher than 12.5p, especially when its operations are in a relatively benign part of the world (and the Namibian government own nearly 9% of Weatherly derisking further). I guess a watch and wait on this one for now!

Solomon Gold (SOLG) - A big sell off in Solomon Gold this week meant it hit 26p. I have been initiating a position this week on this decline and believe the company offers good value given its exploration prospects. (see previous post - http://contrarianinvestoruk.blogspot.com/2011/03/solomon-gold-solg-is-based-in-brisbane.html)

Rockhopper (RKH) - Good to see a nice 6% bounce to 246p as the big seller finally seems to be out of the way and the results from the 14/10-4 well loom ever closer. I bought a little more yesterday as the momentum on this stock finally seems to be turning positive after a drop of more than 40% after the 14/10-3 well in February. 

Bowleven (BLVN) - A very strong week for Cameroon oil explorer Bowleven, with the shares rising 7% on the week to 359p. A couple of weeks ago they had dropped below £3.00, and were completely oversold given the prospects. A Goldman Sachs conviction buy addition finally turned the corner and its been up ever since. I took the opportunity to sell some BLVN to invest in SOLG, RKH and WTI.

Sirius Minerals (SXX) - Nothing new to report on Sirius. A volatile week though with the shares closing at 14p, 7% rise on the week. They hit 15.5p on Wednesday, triggering a sell which was invested in Xcite Energy.  

Middle East unsettles markets again and Xcite Energy takes the brunt of rumour mill

Oil is currently up nearly 3% to just shy of $100 a barrel (WTI Crude), its highest level since the middle of 2008 on fears of an escalation of violence in the middle East and its potential impact on supply. Sentiment wasn't helped as U.S. Federal Reserve Chairman Bernancke said high oil prices could dent a global economic recovery. Gold hit a record high of $1,432, up 22 dollars on the day as the flight to safe havens continued. The FTSE 100 was hit with a drop of 58 points to 5,936, whilst the Dow Industrials is down 137 points to 12,089.

The Contrarian Investor UK portfolio had plenty of action today.

Xcite Energy (XEL) collapsed another 5% to 311p. Rumours abound about reasons for the delay in the reserves upgrade and Competent Persons Report (CPR). Conspiracy theories are circulating that management are hiding something with the shift to TRACS rather than RPS energy to complete the reserves report. Like the rubbish that we saw on the bulletin boards pre-flow test like the Betty Knutsen saga, its almost certain to be complete fiction. The supposed "guys in the know" are spooking ordinary investors to sell shares at daft prices. Market Makers are taking the Michael!!

Then we have the funding issue. Again lots of talk by derampers that Xcite will have a massively discounted placing to fund the Bentley field development. As a reminder from last weeks Reuters interview with Rupert Cole (CFO) - ""We're not of a mind to farm-down ... There's no reason that we can't deliver this and bring the field into production," "bringing a substantial oil field like Bentley into production is a costly process for a company with no cash flow, but Cole believes Xcite can undertake the development without bringing in a partner and possibly without raising fresh equity."I wouldn't rule it out, I wouldn't rule it in either," he said when asked if the company was planning a fundraising, adding that he was encouraged by approaches from institutions willing to lend to the company. See my previous post at http://contrarianinvestoruk.blogspot.com/2011/02/xcites-cfo-cole-confirms-partner-may.html.

I believe 311p is a crazily low price because:
1. Xcite are It is already sitting on substantial oil-in-place volumes of between 109 and 235 million barrels as confirmed by the last CPR - probable 170 mm barrels (which is a legal document). The Bentley field is in the North Sea, no political risks.

2. A new reserves report is due in late March - the 9-3b/6 well flowed at the top end of expectations (2900 barrels per day) and the vertical pilot section of the well encountered a larger than expected oil column towards the end of October 2010. RNS of 31st December said  “In addition to the successful well flow test announced on 21 December 2010, high quality downhole pressure, temperature and sample data has been safely recovered following a 36 hour shut in and build up period after the flow test.” It would be expected that we will looking at 250-300 million barrles.

3. A rig has been contracted from British American offshore (Rowan Norway) and is due for delivery in June and be in operation in October or November

4. Production of 15,000 barrels per day is due to start in early Q1 2011. Upside of 60,000 barrels per day. Field life of 12-15 years.

5. The Bentley field has full infrastructure support through the Bentley alliance which includes BP and Amec.

Enough said really. This feels like pre flow test days when the price was oscillating like crazy on unfounded rumours. I bought then in the dark days when the derampers were calling a "duster". Now I am buying on equally dark days....and hoping for brighter days ahead. But less hope, more conviction!

Fellow North Sea explorer, Encore Oil (EO.) announced today it had spudded two wells. The Cladhan appraisal well 210/30a-4, in which it has a 16.6% interest, was spudded yesterday evening in Northern North Sea Block 210/30a. EnCore's is partnered Sterling Resources (39.9%), Wintershall (33.5%) and Dyas UK (10%). Drilling is expected to take around 40 days, using the Transocean Prospect semi-submersible rig.

EnCore also announced the Burgman exploration well 23/9-4 in Central North Sea Block 28/9 was spudded this morning. It is a joint venture with Premier Oil (PMO), Wintershall, Nautical Petroleum (NPE) and Agora Oil & Gas. The well is exploring the Tay and Cromarty sands and is expected to take approximately 25 days. In addition it will also drill a deeper, Jurassic aged Fulmar sand target. The shares dropped 1% to 119p.

Sirius Minerals (SXX) popped nicely again today with an 11% gain to 14.88p. After buying last week I took some profit to invest in Xcite Energy. I am sure further gains are ahead, but Xcite is just too tempting at 311p,

Bowleven (BLVN) also had a good day, finishing up 6p at 338p. I sold a tranche earlier in the day at over 340p. This stock has risen nicely since the Goldman Sachs conviction buy report last week, it was less than 300p little more than a week ago.

I took the opportunity to increase my stake in Rockhopper (RKH) and also bought into Solomon Islands and Australian gold explorer, Solomon Gold (SOLG) which is now trading at 28.5p (which is only 0.5p higher than the £15 million October 2010 placing). I am finishing a Contrarian Investor review on the company and I hope to post it in the next day or two. Time is tight these days! I was trading SOLG late in 2010, but it has dropped back below 30p and I like the prospects for this company with its varied portfolio of gold assets, particularly in the Ring of Fire area in the Solomons.

Mixed day for Contrarian Investor uk portfolio

Despite an RNS, stating that Bowleven (BLVN) had started on the Sapele-1 sidetrack Sapele-1ST in the Douala Basin, offshore Cameroon, the shares fell 3p to 331p. The aim of Sapele-1ST is to appraise the Deep Omicron oil discovery encountered in the Sapele-1 exploration well. The well is to be drilled to an estimated vertical depth of circa 3,682 metres (4,761 metres measured depth) approximately 2 kilometres from the Deep Omicron oil discovery in the original vertical well. Drilling is expected to take approximately 40 to 50 days. Bowleven also announced that The Vantage Sapphire jack-up rig has now been contracted and the Sapele-2 well will spud around mid March 2011.

Xcite Energy (XEL) dropped 11.5p (3.5%) to 326p after this morning's news that the reserves report would be available at the end of March rather than early in the month. See earlier post: http://contrarianinvestoruk.blogspot.com/2011/02/xcite-energy-reserves-report-delayed.html

On a more positive note, Sirius (SXX) continued its rebound, rising 5% to 13.4p as realisation returns that the stock was oversold on the fall out from last week's Libyan crisis. Copper company, Weatherly (WTI) also rose 4.4% to 12.88p on strong metal prices. Even Rockhopper (RKH) managed a small gain to finish at 233p.

Portfolio review of the week - 26th February 2011

On Friday the FTSE 100 finished up 81 points at 6,001, down 1.3% on the week. The Dow Jones Jones Industrials finished up 62 points, or 0.5%, at 12,130, a 2.1% fall for the week and the worst since mid August 2010. Shares rebounded on Friday as the oil price stabilised and the markets began to be reassured that the Libya's 2.5% contribution to global oil supplies could be covered by other oil producers and that Colonel Gaddafi's position was becoming increasingly precarious. The U.K. market declined less than across the Atlantic because of the greater number of oil and defensive stocks in the FTSE 100.


The U.K. market was thrown into turmoil yesterday as the London Stock exchange computer system crashed for 4 hours, meaning trading was suspended for most of the morning.To coincide with the LSE problems, the revised Q4 2010 GDP figures were released by the Office of National Statistics showing a revised 0.6% decline in the U.K. economy (versus previous estimates of 0.5%).


Despite the market panic in the middle of the week, the Contrarian Investor UK portfolio had mixed fortunes but I took some opportunities during price dips to top up on Xcite Energy (XEL) and Weatherly International. I also bought into another North Sea oil company, Encore Oil for the first time (EO.). 


Xcite Energy (XEL) - Xcite had a good rise on Friday and finished the week at 346p, a 1.8% decline. There have been some reassuring noises that a farm in or placing may not be needed to bring the Bentley heavy oil field into production. The interview published by Rupert Cole (CFO) indicates that any fund raising will be on Xcite's terms not on the institutions and that they have several options open to them (http://contrarianinvestoruk.blogspot.com/2011/02/xcites-cfo-cole-confirms-partner-may.html). 


An update from British American offshore (Rowan Companies) who are currently constructing Xcite's rig, the Rowan Norway also confirms delivery of the rig is due June 2011, with operations starting in the North Sea in November 2011 (with the transit time from the Duabi construction site). Looking at the SEDA (standby equity drawdown agreement), there is insufficient funds remaining to complete the final $30 million instalment due on delivery in June. Therefore it would be anticipated that the company would need alternative funds by this date. With the CPR (competent persons report) due early in March, it is inevitable that Xcite will leverage this report to find the funds its needs and this is not necessarily a discounted placing. As I have stated before, using a bank loan or bond offer seems possible. Either way, went it went back below £3.40 this week, it was a great buying opportunity.


http://www.rowancompanies.com/_filelib/FileCabinet/PDFs/Offshore-CM.pdf?FileName=Offshore-CM.pdf
Rig is under construction with delivery expected in June 2011. Contract executed for combined drilling and production operations with an initial term of 240 days followed by a one year priced option in the low $250s. Production fee of $1 per barrel of oil produced is also payable during the initial term. Customer is required to provide security for the initial term totaling $60 million by the date of shipyard delivery of the rig. The first installment of $15 million was received on February 17, 2011. The second $15 million installment is due February 25, 2011, with the final installment of $30 million due upon delivery of the rig from the shipyard. Rig is expected to commence operations in November 2011.
Rockhopper (RKH) - Another bad week the falklands oil explorer, with the shares dropping 12% to 233p. I have covered the fact earlier in the week that the current market capitalisation (£600 million) is daft with what the RKH have already discovered at Sea Lion (http://contrarianinvestoruk.blogspot.com/2011/02/taking-advantage-of-silly-valuations-on.html). But this frontier explorer is out of favour, and the private investor stampede has moved onto pasteur's new for now! With drilling results from the 14/10-4 well due around mid-March, it is inevitable that this share should starting perking up in a couple of weeks time. Hopefully 230p is the new base, but you never know with a Falklands oil stock!


Encore oil (EO.) - I took the opportunity to buy into North Sea oil explorer, Encore Oil this week, given the company prospects and news flow over the next few weeks. There was talk of a takeover this week by Premier Oil, but this seems a bit far fetched.

Encore own a 16.6% interest in the Cladhan North Sea licence with Sterling Resources (73.4%) and Dyas (10%). Drilling is expected to commence within the next few days at Cladhan (Blocks 210/29a & 210/30a) with the flotilla of vessels apparently on its way. The Burgman prospect is expected to spud any day soon using Encore's contracted rig the Galaxy II.

Sirius Minerals - Another terrible week for potash company Sirius, with a 15% to 13p. No bad news, such sentiment. Topped up a little at 12.5p and now we wait!

Bowleven (BLVN) - Bowleven had a good week with the share reiterated as being on Goldman Sachs conviction buy list, despite rumours of issues in Cameroon which now seem to have been largely diffused. Goldman has said that recent share underperformance has created an attractive entry point into the stock - "We view the upcoming drilling campaign offshore Cameroon positively, with recent success at the Sapele prospect helping to de-risk the surrounding acreage,". The target price was cut to 578p from 623p, with drilling at the Cameroon Sapele-1 prematurely halted because of high pressure gas which the drilling equipment was not specified to handle.The shares rose 5% on the week to 335p.

Weatherly International (WTI) - The interim results this week had plenty of encouraging news from this Namibian copper company (http://contrarianinvestoruk.blogspot.com/2011/02/weatherly-international-interim-results.html). Topped up on WTI. I have great confidence that we will see Weatherly shares significantly higher within weeks.

Market moves up after London Stock Exchange closes for 4 hours

With oil prices stabilising as the end game in Libya seems close as regards Gaddafi, markets responded nicely with the FTSE 100 up 90 points to 6,006 and the Dow Industrials is up 65 to 12,130.  Lots of gains across the board. Some degree of risk appetite has undoubtedly returned with a lot of the AIM stocks that have bombed in the last week bouncing., for example, Kurdistan oil explorer, Gulf Keystone was up over 10%.

The London stock exchange was down all morning after a new software system which was installed 2 weeks ago, sprang a glitch. Hopefully when the LSE merge with the Canadian TSX, they can use their software!

Most of the stocks in the Contrarian Investor UK portfolio are having a good day, Bowleven, Sirius, Weatherly, Encore are all up, the only exception is Rockhopper which is down a couple of pence. Nice to see Xcite Energy up 2.5% today after yesterday's top up. Now I need to see some RKH action, up, not down!

FT.com February 23rd - Bowleven and Encore Oil

London small caps: Broker upgrade boosts Bowleven
By Bryce Elder
Published: February 23 2011 19:39 | Last updated: February 23 2011 19:39


Bowleven rose 3.2 per cent to 323p after Goldman Sachs added the oil explorer to its “conviction buy” list on valuation grounds. Investors were putting no value to Bowleven’s drilling campaign due to start at the Etinde field offshore Cameroon, even though success had the potential to lift the stock above £10, the broker said.

Encore Oil was up by 3.7 per cent to 120½p following press speculation that Premier Oil would agree a bid of around 220p per share for its North Sea peer before May.

“First up, it would be bizarre, in our view, if two companies had agreed a price for a deal and then waited for up to two months to announce it,” said RBS analyst Phil Corbett, who also doubted whether Encore’s exploration portfolio would be of interest to Premier. “Given the market tends to place much greater value on exploration than the industry, and Premier’s only major foray into corporate acquisitions in recent years was through the distressed sale of Oilexco, we would discount these reports for now,” he said.


Source: http://www.ft.com/cms/s/0/eb2119da-3f7e-11e0-a1ba-00144feabdc0.html#axzz1ErFqLn2A

Hurray, a positive day at last for the portfolio, despite FTSE falls!

Despite a nasty day for the FTSE 100 (down 73 to 5,924) and Dow Jones Industrials (currently down 100 to 12,114) it was a positive day for most of the Contrarian Investor stocks. News that The Bank of England’s Monetary Policy Committee (MPC) had moved a little closer to lifting interest rates when it met earlier this was announced today as Spencer Dale, the Bank's chief economist, joined Andrew Sentance and Martin Weale, who voted for higher rates the previous month, in calling for a rate hike. So the vote to retain U.K. base rates at 0.5% was 6-3. No doubt the MPC will be worried about the rising oil price with its impact on inflation and negative influence on economic growth.

Bowleven (BLVN) had its second day of gains, finishing up 10p at 323p with it being reiterated as a Goldman Sach's conviction buy. Goldman has said that recent share underperformance has created an attractive entry point into the stock - "We view the upcoming drilling campaign offshore Cameroon positively, with recent success at the Sapele prospect helping to de-risk the surrounding acreage,". The target price was cut to 578p from 623p, with drilling at the Cameroon Sapele-1 prematurely halted because of high pressure gas which the drilling equipment was not specified to handle. Things appear to be calming down a little in Cameroon, with President Paul Biya reportedly not running for re-election later this year after 28 years in power.

Xcite (XEL) finished up 6.5p at 344p and even Rockhopper (RKH) was in the blue, up 3p at 235p. Could this be the end of the Rockhopper slide at last? Disappointing to see Weatherly international move up only 2% after the positive comments on the interim results report.  The one glitch was the continued slide in Sirius Minerals (SXX) to 13.38p, down 5%.

I took the plunge and bought North Sea oil play, Encore Oil (EO) as it has been on my watch list for a while and around 120p it should be a strong entry point. Didn't want to buy yet another oil company but its North Sea so less risky, oil is going through the roof and frankly I've been struggling to find many decent bets outside of commodity stocks so far.

Sea of red today as fear stalks market

The FTSE 100 managed to regain some of its poise late in the session, finishing down 18 at 5,997 after being much further in the red in the morning. Worries about the Libyan crisis and poor results from retailer Walmart were offset by good consumer confidence numbers from the U.S. and encouraging news on a budget surplus in the U.K. last month. Looks like the VAT rise to 20% and the increase in capital gains tax from 18 to 28% is finally swelling the Treasury coffers!

Another dreadful day for the Contrarian Investor UK portfolio with all the stocks down and with the oil stocks feeling the pain despite the rising oil price. It was nice to see Bowleven finally rebound to finish up 2%  at 313p after falling below £3 this morning. I couldn't resist a top up at £3 with so much news to come from its Cameroon Sapele-1 well and other drilling activities. As for Rockhopper, I am gob smacked it is now at 232p after yet another 6% fall so I am well down on this. Fortunately there is no rush to sell at these levels, i'm holding firm for the results of the 14/10-4 well in mid-March. Crazy that its dropped £1.50 since the 14-10/3 well result and yet Goldman Sachs has its target price over £6. Institution selling plus private investors fearing for their lives. What's with the nonsense about a Sea Lion duster!! What next? Glad i derisked on Xcite last week with anothet 9p fall. Had far too much in Xcite until a couple of weeks ago. Shame I put some of it in Rockhopper, we're all human!!!

Sense of realism finally hits stock markets

After all the worrying developments from the Middle East, rising inflation concerns both here and in China, oil above $100 a barrel, a bloated U.S. Deficit, Eurozone debt worries and weakening consumer sentiment it was always a surprise that the FTSE was still above 6,000 and the S&P 500 hit a level double its March 2009 low last week. The Ftse 100 fell 64  points today to 6,019 with the big banks falling nearly 4% over worries about European debt. U.S. markets were closed due to President's day.

The Contrarian Investor UK portfolio got a battering with Bowleven dropping to 307p, a pound of its recent highs and Rockhopper finishing at 250p, a drop of close to 140p in the last 3 weeks. Xcite continues to drift lower as we await the CPR document to 344p, it was trading at 400p to buy less than 2 weeks ago on takeover rumours. Now the rumours are more of a 350p institutional placing. Its been a bad month, roll on March!

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.

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.