Bowleven — Update 19 August 2016

Bowleven

Buyback demonstrates confidence in asset base

Share buyback

Oil & gas

19 August 2016

Price	24.5p
Market cap	£80m
£0.76/US$
Net cash ($m) at June 2016e		93

Shares in issue	327.3m
Free float	93%
Code	BLVN

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	14.0	18.1	2.1
Rel (local)	10.4	7.0	(2.4)

52-week high/low

27.0p

18.2p

Business description

Bowleven is an AIM-listed, Africa-focused E&P with assets in Cameroon. Its main asset is its 20% net interest in the Etinde development, which holds 290mmboe of 2C contingent resource.

Next events

Share buyback programme	Q316
Appraisal wells	2017

Analysts

Will Forbes	+44 (0)20 3077 5749
Elaine Reynolds	+44 (0)20 3077 5713

oilandgas@edisongroup.com

Edison profile page

Bowleven is a research client of Edison Investment Research Limited

Bowleven’s proposed $10m buyback of its shares shows management’s confidence in the value of its asset base and strength of balance sheet. With shares regularly trading near cash levels (and at a material discount to core NAV), the proposed $10m buyback would be accretive for NAV/share while not reducing the company’s cash position materially (given an additional $15m cash injection is expected in September) or limiting its ability to execute on its strategy. We have made a number of changes to our valuation, with core NAV rising from 45p to 46p/share. Our RENAV moves to 61p/share (from 60p/share). We note that these valuations have the potential to move up by 6% if the shares are bought back at a price of 22p/share.

Year end	Revenue ($m)	PBT* ($m)	Operating cash flow ($m)	Capex ($m)	Net cash ($m)
06/15	0.0	(14.1)	(10.4)	35.1	144.8
06/16e	0.0	(4.5)	(14.0)	38.9	92.5
06/17e	6.4	(10.9)	(4.9)	39.0	63.8
06/18e	14.4	(9.4)	(0.5)	6.0	82.6

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Highly accretive to NAV/share

The shares have traded close to cash (and at a significant discount to our NAV) for some time, implying very little value for the Etinde and Bomono assets. The buyback is therefore strongly accretive to valuation and should highlight to investors the value of BLVN’s development and appraisal assets.

Etinde and Bomono developments ongoing

NewAge has identified a small-scale (75-100mmscfd) LNG plant with offshore processing as its preferred concept for Etinde (offering the most viable and time efficient option) and is in discussions with the government. Other concepts (fertiliser, gas to power and other LNG schemes) remain options, while the results of the carried Intra Isongo appraisal wells (due in 2017) have the potential to more than double the reserve base. Bomono development discussions are ongoing, with government EA approval the next milestone.

Valuation: Core NAV increases to 46p/share

We have made a number of changes to our valuation (including the effect of the weaker pound), which moves core NAV from 45p/share to 46p/share, while the RENAV moves from 60p/share to 61p/share. The buyback could add around 6% to these NAVs/share (depending on the share price at which the buyback is executed). There are uncertainties to the timing and concept of the Etinde development (where a small-scale LNG solution is now preferred), but with gross 2C contingent resources of 290mmboe and strong partners, the board has shown confidence in the long-term value of the company. We also note the carried appraisal wells (in early 2017) have the potential to more than double the resource base in the next six to nine months.

Little impact on strategy

We do not believe the buyback signals that the company will stop looking at acquisition opportunities in the current environment. Although the buyback is aimed at spending as much as $10m, even the full use of this sum would not dent financial flexibility. We note that Bowleven is due $15m at the end of September, so its capacity to make acquisitions is not reduced markedly.

Having said this, we expect the company to continue to be conservative with its cash, being careful not to overpay for any acquisitions. We see its withdrawal from the Aminex assets in Tanzania as evidence of its caution.

Accretive purchase of shares increases valuation

The buyback of shares at a significant discount to NAV/share is clearly an accretive action.

We have made changes to our previously published valuation (when core NAV was 45p/share). These are primarily to reflect the decline of sterling following Brexit (mechanistic application, this alone would have increased the core NAV by around 9.5%), partially offset by other modelling adjustments including to G&A (given we assume all is incurred in pounds sterling), cash burn to H216, working capital and expected payments of $15m due from NewAge/Lukoil at the end of September (we now assume 100% of this value). The result is a new core NAV of 46p/share and a RENAV of 61p/share (from 60p/share).

The impact of the buyback can be seen in the sensitivity tables below, but could add up to another 6% to core NAV/share if we assume buybacks are executed at 22p/share.

At this point we have not made changes to our assumptions on the development of Etinde (we still assume a fertiliser solution with first gas in 2022), though we acknowledge that a different solution (small-scale, accelerated LNG scheme with offshore processing) is the first choice for the consortium. We explicitly assume that the Etinde project receives FID at the start of 2018, triggering a payment of $25m to Bowleven. We also leave our modelling of Bomono unchanged (assumes first production in H217), though we note that without a further update on progress here delays to this timetable would not be a surprise.

We expect to update the valuation as and when we get further details on the projects and when the buyback is completed.

Exhibit 1: Valuation summary

Asset	£0.76/US$ No of shares: 327.28		Recoverable reserves			Net risked value
	Diluted WI	CoS	Gross	Net	NPV	@12.5% DR		DR sensitivity
	%	%	mmboe		$/boe	$m	p/share	10%	15%	20%
Net (Debt) Cash - June 2016e	100%	100%				93	22	23	23	23
SG&A (NPV of 3 yrs)	100%	100%				(27)	(6)	(7)	(7)	(7)
$25m on FID (assumed 2017)	100%	87%				22	5	5	5	5
$15m on appraisal wells (cash-in assumed end Sept 2016, wells drilled early 2017)	100%	100%				15	4	4	4	4
Development								0	0	0
Etinde development	20%	50%	181	36	5.2	94	22	32	17	9
Core NAV						196	46	56	41	33
Potential development								0	0	0
CLNG extension	20%	20%	109	22	6.7	29	7	7	7	7
Bomono - Moambe small scale gas project	90%	50%	11	10	6.0	30	7	10	6	4
Possible exploration								0	0	0
Bomono - Zingana Power Supply	90%	24%	27	24	2.3	14	3	6	2	0
Cost of cash shortfall for development	100%	24%				(6)	(1)	(1)	(1)	(1)
Possible exploration NAV						67	16	21	13	9
RENAV						263	61	77	54	42

Source: Edison Investment Research. Note: This does not include the impact of the proposed buyback, which would deplete cash reserves, but reduce the share count.

Impact of buyback

As approved at the AGM, the management is authorised to buy back up to 48,619,857 shares, representing 14.99% of the share capital of the company. The company has announced that it will seek to purchase up to $10m of shares, which represents around 10% of the current market cap. It sought approval to do this at the last AGM (and approval lasts until the next AGM).

Our modelling does not assume the buyback, but we set out below the degree of NAV/share impact based on various scenarios in which shares are bought and cancelled. This indicates that NAV/share could be boosted by up to c 6% depending on the number and price of shares bought back. Given the significant discount on which the shares trade (vs our NAV), the buyback is clearly accretive.

Exhibit 2: Accretion to core NAV/share, according to shares bought back and price paid

	% of current share capital bought back	2.5%	5.0%	7.5%	10.0%
	Shares bought back	8.2m	16.4m	24.5m	32.7m
Price, p/share	20.0	1.4%	3.0%	4.6%	6.2%
	22.0	1.3%	2.7%	4.2%	5.8%
	24.0	1.2%	2.5%	3.9%	5.3%
	26.0	1.1%	2.3%	3.5%	4.8%
	28.0	1.0%	2.0%	3.1%	4.3%
	30.0	0.9%	1.8%	2.8%	3.8%

Source: Edison Investment Research. Note: Grey shading indicates cases where the company would need to spend more than $10m in buying back the shares.

Financials

Bowleven’s balance sheet strength (of an estimated $93m net cash at end June 2016) allows it to make the proposed $10m buyback with little impact on its financial flexibility. The terms of the farm-out with NewAge/Lukoil guarantee Bowleven $15m at the end of September 2016. As a result, the company’s cash position would be stronger at the end of September than it is now, with the added bonus of a smaller share count.

The company remains well financed to invest in its existing asset base and new opportunities. The carry of the two appraisal wells on Etinde in early 2017 means little cash outflow is expected before the middle of 2017, while Bomono’s development plan of rented power gen units reduces upfront capex.

Exhibit 3: Financial summary

	US$000s	2013	2014	2015	2016e	2017e	2018e
Year end June		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS

Revenue		0	0	0	0	6,411	14,355
Cost of Sales		0	0	0	0	(2,190)	(4,380)
Gross Profit		0	0	0	0	4,221	9,975
EBITDA		(10,592)	(11,604)	(11,471)	(10,196)	(6,799)	(1,596)
Operating Profit (before GW and except.)		(11,088)	(12,025)	(11,868)	(10,837)	(11,111)	(9,581)
Exceptionals		0	0	(75,959)	(133,458)	15,000	25,000
Goodwill and intangible amortisation		0	0	0	0	0	0
Operating Profit		(11,088)	(12,025)	(87,827)	(144,295)	3,889	15,419
Net foreign exchange gain/(loss)		0	0	0	0	0	0
Net Interest		7	(1,577)	(2,192)	6,326	239	187
Profit Before Tax (norm)		(11,081)	(13,602)	(14,060)	(4,511)	(10,872)	(9,394)
Profit Before Tax (FRS 3)		(11,081)	(13,602)	(90,019)	(137,969)	4,128	15,606
Tax		0	0	0	0	0	(851)
Profit After Tax (norm)		(11,081)	(13,602)	(14,060)	(4,511)	(10,872)	(10,245)
Profit After Tax (FRS 3)		(11,081)	(13,602)	(90,019)	(137,969)	4,128	14,755

Average Number of Shares Outstanding (m)		295	324.3	324.3	327.3	327.3	327.3
EPS - normalised (c)		(3.8)	(4.2)	(4.3)	(1.4)	(3.3)	(3.1)

EPS - FRS 3 (c)		(3.8)	(4.2)	(27.8)	(42.2)	1.3	4.5
Dividend per share (c)		0.0	0.0	0.0	0.0	0.0	0.0

Gross Margin (%)		N/A	N/A	N/A	N/A	66%	69%
EBITDA Margin (%)		N/A	N/A	N/A	N/A	-106%	-11%
Operating Margin (before GW and except.) (%)		N/A	N/A	N/A	N/A	-173%	-67%

BALANCE SHEET
Fixed Assets		533,437	551,446	306,558	212,886	247,573	245,589
Intangible Assets		532,507	550,745	304,662	207,931	211,419	204,634
Tangible Assets		930	701	1,896	4,955	36,155	40,955
Investments		0	0	0	0	0	0
Current Assets		52,150	42,351	212,029	161,861	133,201	151,935
Stocks		11,023	10,404	5,370	6,500	6,500	6,500
Debtors		16,385	6,493	6,431	7,500	7,500	7,500
Cash		19,742	20,454	144,751	92,510	63,850	82,584
Other receivables		5,000	5,000	55,477	55,351	55,351	55,351
Current Liabilities		(15,568)	(6,274)	(12,695)	(12,000)	(12,000)	(12,000)
Creditors		(15,568)	(6,274)	(12,695)	(12,000)	(12,000)	(12,000)
Short term borrowings		0	0	0	0	0	0
Long Term Liabilities		0	0	0	0	0	0
Long term borrowings		0	0	0	0	0	0
Other long term liabilities		0	0	0	0	0	0
Net Assets		570,019	587,523	505,892	362,746	368,774	385,524

CASH FLOW
Operating Cash Flow		(8,404)	(8,576)	(10,438)	(13,956)	(4,899)	(453)
Net Interest		556	177	139	269	239	187
Tax		0	0	0	0	0	0
Capex		(114,381)	(18,037)	(35,141)	(38,876)	(39,000)	(6,000)
Acquisitions/disposals		0	0	160,688	0	0	0
Financing		76	20,924	71	445	0	0
Other		0	4,482	9,016	39	15,000	25,000
Net Cash Flow		(122,153)	(1,030)	124,335	(52,078)	(28,660)	18,734
Opening net debt/(cash)		(142,481)	(19,742)	(20,454)	(144,751)	(92,510)	(63,850)
Effect of FX changes		(586)	1,742	(38)	(163)	0	0
Other		0	0	0	0	0	(0)
Closing net debt/(cash)		(19,742)	(20,454)	(144,751)	(92,510)	(63,850)	(82,584)

Source: Edison Investment Research, Bowleven accounts. Note: This excludes the potential effects of the proposed buyback, which may reduce cash reserves by up to $10m and reduce the share count.

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