Wednesday, 30 October 2013

#Emotions don't help investors

We've all been there. Well I have. And I’m sure many of you have too. Panic buying and selling stocks - in the heat of the moment when emotion causes us to make poor decisions. Buying on spikes, holding onto bad stocks forever, selling at the bottom, not taking profits, buying and selling too frequently - these are all common mistakes for investors - and 24/7 access to online portfolios, bullet boards full of dubious characters, and inexperience or poor research can lead to emotions getting the better of us. 

I've done a bit of research into the reasons our emotions get in the way of making sound decisions. Why? Because I think I've probably learnt most of the lessons the hard way and at the start of 2013 I decided to do more research, and stick to an investing plan. It’s hard but it’s proving more successful. In hindsight I've still made some dubious decisions this year, but at least I am making more informed dubious decisions! And it's easier to hold myself to account when things go well or badly. Thinking about what my plan really is has helped me learn more about what works for me, in terms of timescales, risk, & return expectations etc.

To illustrate the consequences of not doing this, I confess that in 2011 I bought Angel Mining stock for no other reason than it was touted as a potential multi-bagger. I did very little research other than reading past RNS’s and a quick glance through the web site. There was no evidence that they would achieve their production projections, and looking back now wearing those lovely hindsight glasses, the company was riddled with debt, the mine was in a godforsaken corner of Greenland, they hadn't met any of their previous targets, were running on a shoe string, had severe staff retention issues, and failed to keep the market properly informed. Wow. I would have been better going to the casino. In fact it would have been far more enjoyable and I reckon without doubt the odds would have been better!

So why do we make these poor decisions? The following themes seem to be key to our psychology whilst trading:

In a 2006 study*, a researcher called James Montier found that 74% of 300 fund managers surveyed believed they had produced above average returns. I’m not a great mathematician, but even I know that only 50% of anything can be above average. The point is that many investors are over confident in their own abilities and judgement. We’re sure we’ll beat the market and that we've chosen good investments. And the big firms don't help with our expectations - take a look at the ridiculous advert at the end of this post! We pay more attention to the things we know about a stock that reinforce our positive belief in it, but pay less (or no) attention to the things we either don’t know, don’t understand, or that don’t meet with our thoughts on a stock.

Herd mentality
As human beings we want to fit in. We mirror the actions or thoughts of others in order to do so. We look to find positions that validate our beliefs. As investors, we take notice of people who support our views, and discount as “paid derampers” people who challenge our beliefs. Even though we all know that the comments of many posters on bulletin boards are dubious, we still love it when their sentiment matches our position. And yet that is just bonkers. We don’t even know these people are real! Never met them, no idea of their values, education, knowledge, position, motivation, experience or truthfulness. For example, how many of you would admit in private that the poster “Dogpog” influenced, even a little, an investment in Range Resources? Go on, be honest. It’s madness. And where is Mr Dogsbollox now? Let’s just say I’m pretty sure he got out before the drop!

Evidence would suggest real stock market returns are over the long term. And by that they are not talking 3 months. Timescales of 10 years or more are not uncommon, and yet nowadays it seems that a few months, even weeks is seen as ages. Looking every day at a portfolio is madness! We should probably check in once every 2 weeks and not in-between. But to me that would be as difficult as giving up smoking or never having a glass of wine. I just can’t get by without looking at my portfolio every day, usually several times. But why? I generally buy stocks I hope to see a good return from over a year or two, so why do I torture myself checking on performance every day? Because I can, and this is why sometimes my iPhone isn't helpful as patience is easily eroded.

When portfolios sink underwater fear can quickly take over. In my experience losing “paper” money is not much easier than real money, and when fear kicks in it is easy to make rash decisions. Liquidating stock holdings, just as a stock hits an all time low, can feel like a relief, but it can be the worst time to sell up. If fundamentals change that may be a good reason to sell, but when “in the grip” of fear and financial loss it can be very hard to stand back and assess the situation rationally.

Greed causes us to hold onto winning stocks past the point of maximum return / time. We hopefully set exit prices when we buy into stocks, but how many of us move them, or think “what if I just raise it a bit higher” once those targets are met? The greed for bigger returns is a hard one to resist, especially when it is underpinned by a “can’t lose” mentality. If paper profit is already made, it’s easy to think that I can’t lose, as further increases will increase the paper losses, and a drop will mean I’m still ok, won’t it? But that’s only the case when you’re up. If the price then falls further, there is no way most of us will sell as we are left thinking that we didn't sell at the higher price and there is therefore no point selling at the lower price! We all know what it feels like when the price then continues to fall below our original buy in price

Gamblers Fallacy
Assuming that a bear run, or bull run in a stock is going to reverse, “because statistically that's what is likely to happen” is known as gamblers fallacy. Basically this suggests that we tend to believe that once a stock has risen, it will fall, and once a stock has fallen, it will rise. This results in us selling stocks early before they then continue to rise much further, or not selling stocks as they fall because we believe they will surely rise again.  Leaving aside real changes in a company’s performance or fundamentals, stocks are not statistically likely to rise or fall, just because they have fallen or risen before. There are many examples of investors selling out of companies like ASOS when they saw 50% growth, only to see the stock continuing to increase by 5000% over the following 2 years. 

“If a stock used to be 50p, and it is now 10p, it must be cheap right?” Wrong. Anchoring is a psychological issue when a person judges the relative value of something based on something similar which gives a false sense of value. Those of us who are older than 30 will remember that £1 used to = US$2. But that doesn't mean that today’s £1=$1.5 is expensive. Because we are anchoring it on a false comparison.

In summary, lessons about emotions and investing are easy to learn, often the hard way, but very hard to implement. It’s easy to make the same mistakes again, and as most of us are connected to our portfolios constantly, via mobile or tablet, learning to control our emotions and make sound decisions is critically important.

Having a trading plan, which involves being disciplined, sticking to an exit price, taking losses early, paying attention to what we don’t know or don’t understand, having realistic timescales for growth, and basing our decisions on facts, are all vital for success, and even more so in today’s "traders" market. It's so easy to be drawn into emotional decision making, especially with bulletin boards and instant portfolios at our finger tips 24 hours a day, 7 days a week. I’m trying to be more disciplined and stick to my plan. Now, I've gotta go, I’m off to check how my portfolio has done today and what Scottpear and Cheapaspastillas are saying about Xcite and Bowleven ...... good luck :)

*Montier, James, Behaving Badly (February 2, 2006). Available at SSRN: or

One of my favorite adverts - no experience, no capital and he's become a trader! Great. Next week he'll be non the wiser and broke! Let's hope Frank still feels great.

Wednesday, 23 October 2013

#BLVN Bowleven catches my attention

Along with my main holding in Xcite Energy, I have a small holding in "PI sister company" Bowleven, bought recently at 56p, more as a short term trade than an investment. It’s a share I watched for ages, seeing it rise and fall, spike on takeover speculation, and since fall back to very low levels. Recently there’s been some significant troll activity calling the price down to 25p, talking about the total lack of assets and the imminent collapse of the share price. This intrigued me so I decided to do some research into Bowleven to get a sense of the real long term value proposition and whether I had missed something.

On investigation, there are some fantastic positives with Bowleven, not least the recent excellent well results and the journey is certainly under way to realise the intrinsic value within. Whilst this value is not yet shown, I’m happy to build, trade and build some more from these levels, as barring some significant change to conditions I don’t see much downside. I can live with falls to the 50’s again if that’s what plays out, but at some point I’m sure this will be a multi-bagger from here. Anyway, for those who want an overview of Bowleven pulled together, I hope the following gives you an idea of the investment case here……

Bowleven’s strategy

Bowleven is focused on Africa. It holds interests onshore and offshore Cameroon and onshore Kenya. It holds a 75% interest in the offshore Cameroon shallow water “Etinde” Permit, where plans for a staged development of the discoveries are advancing. The acreage is located across the Rio del Rey basin and has contingent resources and further significant exploration potential. Bowleven also holds a 100% interest in the onshore Cameroon Bomono Permit, where exploration drilling is planned. Both permits are operated by Bowleven through its 100% subsidiary EurOil Limited. Cameroon has an established oil industry with a history of production from the Rio Del Rey Basin. It borders prolific producing countries such as Nigeria, Equatorial Guinea, Gabon and Congo.

In September 2012 Bowleven entered into a farm-in agreement to acquire a 50% interest in an onshore Kenya exploration block - 11B - where early stage exploration is underway. The block is to the north of the Lokichar Basin where a significant oil discovery (Ngamia-1 well) has been made. Completion of the farm-in is subject to normal approval from Kenyan authorities.

The Bowleven Team

The Group seems to have a strong management team with excellent technical experience and a track record of finding, financing and delivering O&G. Kevin Hart, CEO, was FD at Cairn Energy for over 8 years. He’s been on the Bowleven board since 2006. David Clarkson, Operations Director, previously worked for BP where he held a variety of senior positions including Technical VP, Projects & Engineering. Ed Willet, Exploration Director, joined Cairn in 1989 where he held technical and management roles. Philip Tracy, NED, was previously Operations & Engineering Director at Cairn, and Tim Sulliven, NED, was previously Deputy CEO at Agora O&G, CEO of Revus Energy, and Enterprise Oils Worldwide Exploration Manager. So more than a few years of experience in this game, with good success.

EurOil, Bowleven’s subsidiary, has operated in Cameroon since 1998 and has a great track record drilling exploration and appraisal wells. Since 2007 the current team have drilled 9 wells, all as operator, and all of which have encountered hydrocarbons.

The board hold a number of shares in the company as outlined

Total shares
Total cost of
shares purchased
Shares acquired
on vesting LTIPs
Total shares
J D Brown
R G Hanna
K Hart
T Sullivan
Chief Tabetando
P O J Tracy
E A F Willett
P G Wilson

Timeline of Bowleven’s operations to date:

2007: Successful IE-2 appraisal well (MLHP-7) and D1-r exploration well (MLHP-5). 
Bomono Permit PSC awarded by Cameroon government.
2008: Etinde Permit PSC terms (blocks MLHP-5,6 and 7) agreed with Cameroon government. 
First oil discovery on Etinde Permit; IF-1r well tested an average of 3,371 bopd.
2010: Sapele-1 exploration well (MLHP-5) discovers hydrocarbons in Lower & Deep Omicron Miocene intervals.
IE-3 appraisal well (MLHP-7) tested cumulative max rate of c.23kboepd from 5 zones; oil encountered at IE.
Extensive seismic acquired over Cameroon. Significant exploration potential identified in Douala Basin. Farm-out of 25% interest in Etinde completed (Bowleven 75%).

2011: Sapele-3 well (MLHP-5) significantly extended the Deep Omicron fairway. 2 Sapele appraisal wells (Sapele-1ST and Sapele-2; MLHP-5) tested oil from Deep Omicron interval. Extensive deeper prospectivity established at Paleocene and Cretaceous levels; 3D 4C OBC development seismic acquired over the IE and IF fields (MLHP-7).
2012: Formal Etinde Exploitation Authorisation Application (EEAA) submitted to Cameroon authorities. Alliance agreement signed with Petrofac - potential access of up to $500 million towards Stage I development of Etinde and to Petrofac expertise. Farm-in to exploration acreage in Kenya (50% Block 11B). MOU signed with Ferrostaal for feedgas for proposed fertiliser plant in Cameroon. 'Hub and spoke' development plans of Etinde Permit underway.
Independent assessment validates Sapele Deep Omicron in-place fairway volumes (MLHP-5).
2013: IM-5 well (MLHP-7) tested condensate-rich gas from Middle and Intra Isongo intervals confirming commercial production rates and significant liquids content of gas. Combined max flow rate of 60 mmscfd and 7,819 bcpd (total over 17,800 boepd). Significant Intra Isongo discovery (70m net pay) at IM-5 highlights new material exploration / appraisal play. High quality condensate (approximately 43 degree API) produced on test. Updated IM field volumetrics indicate more than sufficient gas volumes to meet fertiliser plant requirements. Gas sales term sheet for proposed fertiliser plant in Cameroon agreed with Ferrostaal. Onshore Bomono Zingana-1 well site prepared pending commencement of exploration drilling operations

Summary of interests:

Etinde & Sapele Permits, Offshore Cameroon (Bowleven 75%, CAMOP 25%)

These lie in shallow water adjacent to the coast. A number of hydrocarbon discoveries including oil, condensate and gas have been made. Net P50 contingent resource is 203mmboe. Considerable upside remains throughout the permit. This includes blocks MLHP-7 and MLHP-5, where discoveries have already been made, and the yet undrilled block MLHP-6. The Cameroon state has the right to back-in for a 20% share of any Etinde development, which would reduce Bowleven’s interest to 60%.

In November 2012 a Strategic Alliance Agreement was signed with Petrofac Group in relation to Stage I of the Etinde development. The alliance provides potential access to up to $500million of investment capital and to Petrofac’s development expertise (see below for further details of this arrangement).

The Douala Basin has lots more potential including at Paleocene and Cretaceous reservoir intervals. In the Rio Del Rey Basin the IM-5 well encountered a potentially significant Intra Isongo reservoir and highlighted additional potential in the greater interval.

The focus now is on bringing the Etinde discoveries into production. A staged ‘hub and spoke’ development of blocks MLHP-7 and MLHP-5 is planned. First production from Stage 1 (fields on MLHP-7) is targeted for 2016. Final investment decision (FID) for Stage 1 will hopefully be made by the end of 2013. Key FID requirements are close to being completed - The formal Etinde Exploration Auth application (EEAA) was submitted last November and is since being updated to integrate the results of the IM-5 well. A gas sales term sheet has already been agreed. Development finance is in place with Petrofac.

The “Hub and Spoke” Development plan:

The concept centres on an onshore processing facility (the hub) linked to offshore unmanned platforms / producing wells (the spokes). More spokes can be added if/as further discoveries are made. Oil, condensate and wet gas will be delivered to the hub where liquid stripping and natural gas liquids extraction will be carried out. The initial focus for development is to supply 70mmscfd of dry gas to a proposed fertiliser plant. The successful test of the IM-5 well in April 2013 confirmed more than sufficient volumes to supply this. Liquids and NGLs will be marketed and sold internationally.

Stage I – focus on block MLHP-7.
Stage II – integration of block MLHP-5 discoveries (Sapele).

In addition to multiple liquids discoveries there are significant volumes of gas present across the Etinde Permit. Identifying an off-take route for the gas is key to maximising this potential. At the time of the successful IM-5 test, Kevin Hart commented
"We are delighted with the overall results from the IM-5 well which have surpassed our expectations. The flow rates that have been achieved on test demonstrate substantial well deliverability from both intervals and further strengthen the foundation for the planned development of Etinde. Due to the high deliverability of the Intra and Middle Isongo reservoirs we are confident we will be able to reduce the number of wells required to supply the planned fertiliser plant. The IM-5 well has not only delivered a substantial increase in estimated hydrocarbon volumes but it has also confirmed the presence of liquids rich hydrocarbons at the Isongo Marine field, a significant value driver for development plans on Etinde. In addition to proving that there are more than sufficient gas volumes present on a P90 basis to meet the 70 mmscfd dry gas requirements of the fertiliser plant, the IM-5 well has derisked considerable further prospectivity with significant volumetric upside on the block”
So there is every reason to feel positive about the Etinde value here in my opinion.

Bomono Permit, Onshore Cameroon (Bowleven 100%)

The Bomono Permit is located in the Douala Basin. The acreage has multiple surface oil seeps but is largely unexplored in recent times. Wells drilled in the 1950s and surface oil seeps prove an active hydrocarbons system exists. Bowleven acquired 500km of 2D seismic and a full set of surface samples for analysis. Evaluation revealed multiple Tertiary and Cretaceous prospects and leads. The commitment is to drill two wells by December 2014. The location for the first well (Zingana-1) has been selected and the site has been prepared. The well is targeting Tertiary reservoir intervals.

Bowleven intends to farm out a proportion of the Bomono prospect but the completion of this has been delayed by the preferred bidder’s protracted approval process. Alternative farm-in partners are being considered in parallel. The Cameroon state has the right to back-in for a 10% share of any Bomono development. There seems to be a question mark hanging over the farm in and I suggest this is one of the downsides to the investment as the 2014 drilling may, in my opinion, be challenging to achieve without progress on a farm in.

Block 11B, Kenya (Bowleven 50%, Adamantine Energy 50% and operator)

In September 2012 Bowleven farmed-in to block 11B, located in an emerging hydrocarbon province at the intersection of the tertiary and cretaceous East African Rift systems. The block is analogous to oil production areas in the Melut and Muglad basins in Sudan and is north of recent oil discoveries in Kenya. It encompasses an area covering the Loeli, Lotikipi, Gatome and South Gatome basins. These basins are part of the East African Rift system to the north of the Lokichar Basin, where significant discoveries have recently been made (Ngamia, Twiga).

With minimal exploration to date on the block the availability of data is limited. Analyses of the existing data acquired by predecessors suggest the basins are of similar form to Lokichar. The current work programme includes the acquisition of an airborne geophysical survey. Planning for the acquisition of 2D seismic is underway, with commencement of field operations targeted for later in 2013

First Oil plc, a privately owned UK company, is now a strategic partner in this area, having acquired a 30% holding in Bowleven’s East African focused subsidiary in return for funding exploration activities. First Oil have committed to fund up to $9 million of initial work (net carry of $6 million), with a further commitment to fund up to $12.5 million (net carry $5 million) of additional contingent work. Separately, the parties have also agreed to co-operate in investigating early entry exploration opportunities across the East African Rift System. As part of this agreement First Oil may contribute up to $3.6 million towards Bowleven's share of funding in any future new investments.

Personally I don’t see share price impact from Kenya at the moment - there needs to be quite a lot of work to get through before the potential will be clearer. Something for the future perhaps, but it’s good to see a strategic partner already involved and potentially moving things along.

Upcoming Future news

By the end of the year / early 2014 there should be several positive updates for shareholders which should see share price action:

1. Etinde Exploration Authority Application & Final Investment Decision. 
Kevin Hart, 23rd May 2013: "The agreement of a gas sales term sheet with Ferrostaal is a key step..... .....and the signing ceremony highlights the importance of this project for Cameroon, Bowleven and all stakeholders. The EEAA is in the process of being updated for the results of the successful IM-5 well and with this, alongside the progress on gas sales, we remain on track for FID and project sanction by the end of 2013."

As the IM-5 well demonstrated significant potential to supply gas in addition to the fertiliser plant, the Cameroon authorities requested that the EEAA be expanded to capture other additional off-take solutions (including GDF Suez and SNH Cameroon LNG initiative) prior to submission. These schemes would be in addition to Stage I of the Etinde development to supply 70mmscfd dry gas to the fertiliser plant. The Cameroon authorities have indicated that an early grant of the Exploitation Authorisation is a priority and the final EEAA submission is planned for late Q3/Q4 2013.

2. Potential for volumetric upgrades and conversion of resources to reserves.
The volumetrics for the Etinde field are being updated, with Bowleven anticipating a substantial increase in volumes. Even before IM-5 results the expectation was that the P90 gas-in-place had been increased by more than 300% to 531bcf. The mean volumetric for the condensate in place was up by 868% to 184 million barrels.

3. Potential for farm in news for onshore Bomono prospect

4. Field operations in Kenya may possibly get underway towards the end of 2013

So, having considered all that, my top 10 positives for Bowleven are as follows:-
  1. Petrofac’s $US500m of funding if FID agreed – this should cover first stage development and provide cUS$60m of back costs. Whist the terms may be beneficial for Petrofac, we have the security of funding in place for the vast majority, if not all of the development phase 1.
  2. IM5 results well ahead of expectations. This has significantly derisked the development. Significant liquids and gas found, and it will fully meet the supply to the fertiliser plant. Liquids discovery in IM5 gives potential for significant upgrade in resources and raises the COS on surrounding drills.
  3. This area is surrounded by industry experts already eg, Addax / Sinopec, which could easily lead to a bid for Bowleven. “Little fish, big pond” springs to mind.
  4. Sapele results suggest significant upside for phase 2, with potential for a farm in to unlock and develop value.
  5. Opportunity for LNG GDF development and the value of Non Gas Liquids which at present are given nil value.
  6. Bomono farm out could unlock significant separate carried exploration in a prospective permit. Some “wildcat” exploration upside, but backed by Etinde production.
  7. Kenya a significant exploration play. Next door to big discoveries. But for the medium / long term
  8. Share price is significantly disconnected from medium term value IMO. For me this is now much lower risk – resources have been discovered, flow tests have de-risked the development, funding is available and whether this takes a year, 2 or 3 the value will surely come at some point.
  9. Cenkos Securities comment “Value so disconnected from any sensible interpretation of value – most buyers would see value at £1”, and yet the share price is below where it was before the IM-5 well was tested.
  10. Previous potential takeover interest from Dragon, before this year’s drilling results were known, would suggest this could be on several interested parties radars now. Another rumour and the SP would likely double from here before confirmation. At the very least this gives an outside chance of a fantastic trading opportunity.
My top Bowleven risks:
  1. Potential falling through of farm out for Bomono – could mean going back to the drawing board with other parties and push activity out timewise.
  2. Potential delays to development plans – bureaucracy, FID delay, rig challenges, etc. Could all push drilling and development plans backwards.
  3. Cameroon political or other risk unknown at this time
  4. Collapse in gas or oil prices before production up and running.

In conclusion:

As I said I bought recently as the upside seemed too tempting, seeing a quick climb back above 60p. I intended to trade back out, but am holding on now for the development news. Whether I trade or not, I will look to build a larger position here and will certainly look to add to my position on further dips as a medium term play to 2015/16.

There are plenty of PI's jumping from Xcite to Bowleven and back, and I can see why. They are both relatively de-risked prospects with considerable upside potential. At the moment my holdings are very much in Xcite, and I see this as a safer investment than Bowleven, due to the booked reserves and North Sea focus, extended well test, and size of field. To see my comments on Xcite see here . But Bowleven has definitely got my interest and Bowleven will be a home for some of my future funds I am sure.

Just need patience here IMO. Good luck.

Further background information:

Very good presentation from RBC Global Energy Conference : here

Some broker comments from this year, some of which were before the IM-5 results were known:

Barclays : NAV-derived Price Target of 225p and commented....”Rather than lean-gas, the fluid type of this formation can now be described as gas condensate, having a liquid-gas ratio of150bl/MScf, which is comparable to the nearby IE field. The additional liquids encountered in the Middle Isongo could therefore provide further upside to the economics of Bowleven’s development offshore Cameroon. Updated volumetrics will be provided at a later stage. The drilling results of the Intra-Isongo formation, which were pre-announced in January, have also been revised upwards. After interpreting the wire-line log data, Bowleven increased the net pay on the Intra-Isongo to 70m from the previous 52-56m range”

Deutsche: “2013 is likely to be a make or break year in realising Etinde’s value potential. Could it be the year when the MLHP-7 resources transition into reserves? Possibly, in our view, with such an event having a potentially significant impact on valuations and sentiment....... Our model of the IM anchored MLHP-7 gas-to-fertiliser scheme delivers a base case unrisked NPV10 of 136p (US$110/bbl), falling to 108p on US$90. We risk this at a 50% chance of development to reflect the uncertainties on development scope / cost ahead of FID. To this, we add free cash balances of US$50m and planned 2013 Bomono well (assumes BLVN is successful in farming down for a free carry) to deliver a base case RENAV of 92p (76p on US$90 pricing). Average of the two delivers 85p. Key risks – IM-5 drilling results, capital cost for Etinde Stage 1 development, progress on Bomono farm-out". Note this was before IM-5 results which came in ahead of expectations.

Fox Davies: BUY, TP 250p “Liquids at Critical Mass?: Today’s confirmation of gas volumes augurs well for the licence’s (MLHP-7) development in the medium term. The real news from today is that they Company’s latest well (IM-5) intersected a liquids rich horizon, which will improve the asset’s profitability, and potentially now create a situation where the liquids volumes have attained sufficient critical mass to enable their economic development independently of the gas, which serves to improve the Company’s outlook yet further...”

Jeffries: “Intra-Isongo volume potential large: Rough estimate 370mmboe to 2500mmboe potential in place, highly significant compared to existing P50 estimates of c.500mmboe. With 20-30% recovery factor and 50% liquids content this could equate to 37mmboe to 380mmboe of recoverable liquids vs current estimate for IE/IF/IM of c.100mmb. What could it be worth? 1p/sh for every incremental 1mmb liquids…with potential for more than 40mmb liquids, clearly material to our 185p/sh current estimate. Even at the low end of our range, we believe our risked SoP could increase 20%”.

Cenkos, May 2013, “The estimated NPV cost of the Petrofac deal with Bowleven is estimated at c20% of the project value compared to an estimated 50% for a conventional farm in”.

Details of the Petrofac Alliance arrangement: Petrofac (PEDWA) return:

The alliance arrangement provides access to up to $500 million of investment capital towards Bowleven’s share of Etinde development expenditure and also provides access to Petrofac’s expertise, purchasing power and personnel (including engineering, design, project management, procurement and training). Bowleven’s plans will be updated to integrate the IM-5 well results with the aim being to reach a final investment decision on development by the end of 2013. At this point Bowleven will have up to US$60 million of the IM-5 well costs reimbursed by Petrofac. 

A summary of the financial arrangement follows. I’m no accountant, and I’m aware that some commentators suggest that the deal is going to sap the short term value from Bowleven as they pay back out of revenue, but my view is that the finance deal is far preferable to significant dilution or many of the other methods of raising significant funds in this challenging marke for finance. And it’s a huge vote of confidence in the development potential from Petrofac.
Petrofac (PEDWA) shall be entitled to the following return in consideration for the provision of its investment:

  • Cost oil/cost gas from the Stage 1 Development: PEDWA is entitled to be paid an amount equal to 80% of Euroil's receipts from sales of cost oil/cost gas produced from the Stage 1 Development, until such time as Petrofac shall have received an amount equal to 1.3 times the investment provided by Petrofac in respect of the Stage 1 Development.
  • Profit oil/profit gas from the Stage 1 Development: PEDWA is entitled to be paid a percentage (Y%) of Euroil's receipts from sales of profit oil/profit gas produced from the Stage 1 Development. Y% shall be determined at FID on the basis of the projections in the agreed Investment Case as follows:
  • a provisional value for Y% shall be set such that the aggregate receipts by PEDWA of cost oil/cost gas and profit oil/profit gas payments from the Stage 1 Development shall be equal to 2.125 times the investment provided by it;
  • if required, that provisional value shall be increased such that PEDWA is projected to receive an IRR of not less than 20%; and
  • if the provisional value for Y% as determined in accordance with the preceding two paragraphs would result in Euroil being projected to receive less than 50% of the projected NPV in respect of Euroil's share of the Stage 1 Development, the value for Y% shall be reduced such that Euroil is projected to receive 50% of such value. Y% may be adjusted downwards in certain circumstances, on which please see below.
Profit oil/profit gas from further or additional developments: PEDWA is also entitled to receive Y% of Euroil's receipts from sales of its profit oil/profit gas from:

  • fields within the Etinde Permit which were not included in the FDP agreed with PEDWA ("Further Developments"); and additional developments (which were not included in the FDP agreed with PEDWA) of fields that were included in the FDP ("Additional Developments").
PEDWA's entitlement to such payments in respect of any Further Development or Additional Development does not begin until Euroil has received consideration for the sale of its share of cost oil/cost gas and profit oil/profit gas from that Further Development or Additional Development equal to its share of the costs of that Further Development or Additional Development.

Monday, 14 October 2013

#BHR The casino continues

An interesting development today regarding Beacon Hill Resources. I commented last week here that the market clearly didn't like the news that they had agreed to issue unsecured convertible loan notes to raise up to US$19.2m, with the share price dropping from 2p to 1.25p. This followed hard on the heels of a drop from 2.6p the week before when an updated JORC compliant reserves statement was published confirming that  BHR have 39.38Mt of coal, with proven and probable saleable reserves of 16.16Mt of which at least 8.3Mt is coking coal. This was less than some investors were expecting, albeit I am not sure where they had got their expectations from. And that was following a drop from over 3p in June on the back of some isolated incidents of civil unrest in Mozambique. 

The summer has been a disaster for the BHR share price falling around 60%

Personally I didn't take too much notice of the civil unrest issue as it is non specific to BHR and should be sorted before elections next year, and I thought the updated JORC statement was reasonably good news confirming that we have an economic mine for 15 years, even in these coal-price-depressed market conditions. There was also some confusion regarding the difference between resources and reserves which I have outlined here. I bought more at 2.1p and 1.27p - and have certainly been cut by the falling knife!

The coverage last week was positive, with SP Angel quoted as reporting "the good news is that funding has been secured to achieve operational plans" but that didn't stop the fall, in part more to do with the shift in export timescales until mid/end 2014, and also in part due to the deal with Darwin and the potential for significant dilution to hit in the coming months. Without doubt the difference in statements regarding production timescales from the BoD between the end of July and the end of September takes some explaining and the BoD must take responsibility for this collapse in confidence.

But today, it emerged that SP Angel, commenting last week on the deal, had got their sums wrong. Whether this was sloppy reporting, bad information passed to them, or, as some of the more cynical BB commentators speculated, a concerted effort to drive the price down to enable a bargain take over, in any event the net effect was to spook investors that with only $4.4m left in the coffers, and a "cash burn rate of $1.5m per month", dilution would be sooner rather than later.

In reality the cash burn is less than half that reported last week, at $700,000 per month. SP Angel had conveniently omitted to include the benefit of BHR's ongoing production. At this revised cash burn rate, with £4.4m in hand, and $7m already drawn down from Latitude and Darwin, it now looks like funds could last a while longer than first expected and some of the reason for the dramatic drop in SP last week is negated.

SP Angel also reminded us today that debt facility negotiations are ongoing, named as with a “South African” bank, and if this arrangement were to be announced any time soon, the market reaction last week would begin to look very overdone in my opinion.

To me, last weeks fall-off-a-cliff share price movement not only looked like it priced in all of the bad news, it also now looks like it priced in some bad news which didn't even exist. Whilst I am very disappointed by the PR from this BoD, it does look like there could be significant upside if any of the market assumptions and pricing in the last 2 weeks are proved to be over-pessimistic.

As was commented on by a market commentator last week, us little guys have no idea what is going on under the surface, we’re just insignificant cannon fodder for the big guns of the city and ii’s. Most play the aim game as we play roulette - badly - and once the wheel stops turning, we pack up and go home, reflecting on the fun we had but poorer and probably a little jaded by the bright lights which failed to deliver the returns we optimistically expected.

But BHR remains a enigma to me. Missed deadlines, strategy failure, dilution, incorrect broker reporting, and now bizarre PR. On the other hand, a turned around H1 performance, wash plant upgrade, Sena rail allocation, first production, 15 year life, economic reserves statement, and now a promise of funding one way or another.

So it’s back to the roulette wheel for me. I increased my stake last Friday and feel like I am now on a red/black spin. The odds feel roughly 50/50 to me - either last week will prove to be overdone, or bad news will follow bad news. I guess my view is the former, otherwise I would have walked away to play another table. Good luck.

Extract from SP Angel note today:

Beacon Hill Resources (BHR LN) 1.4 pence, Mkt Cap £17.1m – Correction to Monthly cash burn at Project
  • Following our comments last week on the change in plans at the Beacon Hill project, the cash burn rate is $700,000 not $1,500,000 per month.
  • The reduced burn rate reflects the fact that the company are keeping a minimum level of production while implementing their new mine plans.
  • The company had $4.4m in cash on their balance sheet prior to the new funding arrangements being put in place.
  • $4m has been drawn from Darwin 1 tranche and $3m from Latitude giving them a total of $11.4m cash equivalent plus $4m of contractor prepayments.
  • The company continue to work on securing a debt facility from a South African bank with an Import Export Guarantee

Wednesday, 9 October 2013

#BHR My bottom drawer just got a little fuller

What a shocking fall off the cliff for BHR. Having posted about their reserves statement only last week, and having bought more at 2.1p I now feel gutted that I could have bought the same shares for nearly half the price just a week later. The RNS released Friday contained the following “highlights” but “lowlights” would have been a better way to describe it based on market reaction:
  • Agreement to issue unsecured convertible loan notes to raise up to approximately US$19.2 million:
  • US$3.3m of unsecured convertible loan notes with a subscription price of US$3.0 million to be issued to the Company’s largest shareholder, Latitude Zero Financial Investment Fund; and
  • Agreement with Darwin, a majority owned subsidiary of Henderson Global Investor’s Volantis Capital, to issue at least £2.75 million (equiv to US$4.45m) and potentially up to an aggregate of £11.0 million (equiv to US$17.8 million) in unsecured convertible loan notes with a subscription price of up to £10.0 million (equiv to US$16.2 million)
  • This financing funds the development of the Phase 2B and 2C Plant upgrades at Beacon Hill’s Minas Moatize Project which should significantly enhance the operational and financial performance of the project, raising capacity from 1.8 mtpa to 2.8mtpa and provides additional working capital for the Company in addition to the US$4.4 million of cash on hand and US$4.5 million in contractor prepayments 
  • The Company also intends to offer new and existing institutional shareholders the opportunity to participate in the convertible loan notes on the same terms and conditions as Latitude to raise additional proceeds to fund discretionary capital expenditure and working capital and will update the market in due course   
  • The Phase 2B and 2C upgrades to commence shortly and scheduled for completion in Q4 2014 cutting production costs to less than US$110 p/t FOB
  • The Company has identified a new and superior rail offload site adjacent to the port of Beira.  Construction and upgrading will take five months and completion is scheduled for completion by Q2 2014
  • Following the completion of these initiatives, the Company will move into a first quartile FOB cash cost position which is key to sustainable cash flow generation
  • Term sheet received from a leading lending bank to provide new secured loan facilities to re-finance Vitol senior debt facilities, refinance and replace any undrawn convertible loan notes, provide capital expenditure and general working capital and overall to substantially lower the cost of capital to the Company

Following the RNS, and in tandem with the chaos in America and across AIM generally, the share price went into free fall. A 50% fall in 2 days hurts. According to one BB poster Chairman Justin Farr-Jones has replied to his email with the following:
“I understand your frustration. Pls accept my apologies in delay to replying. My view is as follows: Majority of the coking coal market is loss making. We need to get to a tier 1 cash cost and must complete the phase 2C washplant upgrade. We need funding to do this. If we complete the upgrade and hit mgmt targets we can make money in difficult markets. The market has priced in full dilution that is why the price has dropped. No one expected it to do so in the manner that it has. We think that is pricing in worst case and we hope to refinance with senior debt and minimise dilution. We can’t make announcements on share price falls when the reason is potential dilution. Our objective is to secure snr debt and remove this concern.”
I really don’t think Mr Farr-Jones does understand the very real frustration and despair that long term patient investors feel. PI’s sitting on thousands of pounds of paper losses. Does the board really understand what it feels like to work hard to save a little money and see it disappear down a never ending hole because of consistently undelivered timescales? I doubt it.

There’s too much going on at the moment to make sense of it all and the dust needs to settle to see what happens next. Maybe it’s been an overreaction and we’ll see a bounce back to 2p levels, but the 1p’s could also be here to stay for another 6 months if BHR don’t deliver on what they have set out. Without doubt many of the original statements about production and first rail transportation in Q3/Q4 this year are now laughable. The recent timescale has just been pushed out by 10 months, and it seems that this has changed in the space of just a few months since the half yearly report which had no mention of any changes. So why did the BoD drop news like this? – I feel despair about their comms like many others on the boards, and feel dismayed that a BoD could be so flaky with the truth, and disrespectful to investors who are their employers. 

And then there is the salt in the wound - we get dilution and in particular dilution via Darwin who just seem like such a bunch of greedy pigs. We’re over the barrel and held tight – so I’m steeling myself to take it like a man - for that’s what getting into bed with Darwin will mean (sorry about the misuse of analogies here but you get my drift) 

So what now? Do I sell out and abandon ship with a loss like many others? Or do I stick it out and extend my timescales, just like the BoD? 

Well, I bought in for a medium term gain, expecting to hold my shares until early 2014 once production was up and running. The market has indeed priced in the worst case situation of full dilution, and barely economic production in the current depressed coal market. It is also sceptical of timescales and promises made, who can blame it? 

I have thought hard about what I want to do. Am I prepared to hold and wait, or would I rather walk away with a loss and move on? Perhaps against my better judgement, I’ve decided I can wait, and I’ve also decided that the future could still turn out well. That’s because:
  • We know that the reserves we have mean we can mine economically for at least 15 years. 
  • We’ve got phase 1 production up and running
  • We’ve got a hard won allocation on the Sena line - a strategic rail allocation of great importance in an up and coming production area of Mozambique. 
  • We have rolling stock in manufacture
  • Our market cap is now only £20million and yet we have assets far in excess of this – so we could be vulnerable to a hostile takeover from a much bigger player. 
  • The financing deal (albeit painful) now guarantees that BHR can get to tier 1 cost status.
  • A Senior debt facility is hopefully on the way later this year or early next. This would replace the 3rd tranche of loan notes and remove much of the dilution 

BHR has got this far with coking coal prices down to $130pt and despite the pain I am feeling I don’t get the sense that BHR are going under, in fact the opposite. The recent average is $170pt and an increase from the current price would see a significant improvement in profitability. 

One poster commented that BHR is the next Angel Mining. I was in Angel and lost everything. Let me make this clear – there are very few similarities between Angel and BHR. The actions of Angel bordered on fraudulent. They never produced anything of substance other than lies, didn’t have the equipment to do it, didn’t have funding secured, and were trying to get gold out of a glacier accessible for only part of the year via a cable car and crampons, in sub zero temperatures. Angel mining makes BHR look like a FTSE100 company. And that’s from very personal painful experience. So let’s not go too far in our trashing of BHR. It’s done well this year, but Friday’s news was not welcome. 

So, on balance, I’m holding for 2014 on the basis that this is about as bad as it could have got, and I hope that now the funding is in place, we should get continued progress towards production in 2014. If, and I accept it’s an if, the BoD deliver the rest of the pieces into place, then I just need to wait longer for the 3/4/5/6p that I expect to get back. I've bought more today at under 1.3p, and now have an average that I feel comfortable will be met at some point. If it all goes tits up, then so be it, but I think on a risk/reward basis that is unlikely now we have our dear friends (cough) from Darwin on board. Wishing all holders a sincerely better week next week.

#MXP Max Petroleum ii's keep buying - why?

Original Post below from 9th October. Updated ii holdings table at the end. Updated 19th November 2013

Max Petroleum frequently release holdings statements from institutional investors. Over the few years the ii's have increased their holdings substantially. But Why? This is one of the great unanswered questions of life for me, up there with why flies were invented and and how IKEA manage to make furniture for the price of a takeaway.

Considering Max's history, who have been accused of dodgy corporate practice, burnt the fingers of many ii's, but then relaunched themselves only to manage to risk it all and almost blow it all on the NUR-1 deep drill last year, - then why do they still attract share holdings from ii's in the billions?

There may be a number of possible answers?
  1. they know a takeover will be the outcome and are stocking up
  2. they got their fingers burnt in the placings at 17p and are averaging down just like PI's
  3. they think they are actually investing in Milan Airport (MXP)
  4. there is something else going on
I don't know. I'm a bit stumped. There must be a good reason for them to keep buying shares. Maybe they really have lost a fortune but have now been reassured that it will come good as Max do seem to be on a surer footing - the near fatal episode with NUR-1 and the subsequent support from the banks perhaps really has been put in place with no wriggle room for the BoD to muck things up again. There was a time not long ago when Max must have been close to going under but the banks stuck by them and they seem to be moving forwards, although of course the big question (apart from whether they will drill the deeps) is whether they will be able to pay down the debt, drill appraisals, and pay costs from next March when the repayments start.

With production rising from the shallows, a year end target substantially ahead of where they were last year, and Haliburton now project managing the future opportunity with the deeps (subject to farm in) there is much to be positive about with Max. I remain a holder myself, hoping that we may finally see some proper forward momentum now. I want increasing production matching expectations, consistent and positive finance turnaround into 2014, a farm in for the deeps sometime Q1/2, and then debt to begin to be paid down from free cash flow. I think that is just about all possible, and recent drills should lead to a increase in reserves and a new CPR within a couple of months. That just leaves the question of why ii's are still stake building.

Here's hoping they know something that we don't and that the above progress is firmly on the cards and therefore that's the reason they now own somewhere in the region of 80% of Max Petroleum.

For Reference:
Below are the latest ii reported shareholdings according to news releases and the web site. Accepting that this will never be 100% accurate, ie some will have changed and not triggered a notification, but it gives you a feel for how the holdings have changed over the months. I will keep this updated.

Friday, 4 October 2013

#PMG Parkmead looks promising

Parkmeads strategy is “to build a significant new independent oil and gas company, with assets in proven and frontier areas, through exploration, development and innovative commercial transactions in order to maximise shareholder value”

Parkmead is now led by Tom Cross (who formed Dana in 1994 and sold it for £1.9bn in 2010), who became Chairman in 2010. Many of the Parkmead team also held significant positions at Dana (see link)

Parkmead holds assets in the UK and the Netherlands. Parkmead's reserves base has increased rapidly over the past 2 years. It includes 2P reserves of 25.2 mmboe and additional 2C resources of 11.3 mmboe. In addition to Oil and Gas E&P Parkmead has a wholly owned subsidiary Aupec, which provides petroleum economics, benchmarking and valuation expertise to a wide range of government bodies, NOC’s, multinational agencies, and international O&G companies. Parkmead benefits from the relationships and analytical rigour within Aupec as it progresses its strategy throughout the North Sea.

Parkmead also holds a 1.8% stake in Faroe Petroleum. As at 01/10/13 the value of this investment was approximately £4.68 million.The last few years have been busy ones, and Mr Cross has completed a number of canny acquisitions to grow the business at a modest cost.

November 2011
Acquires a 15% interest in the Platypus gas field, located in Southern North Sea. The Dana-operated field is located in Block 48/1a.  It was discovered by Dana in 2010, when the 48/1a-5 well encountered a significant gas bearing Lower Leman Sandstone reservoir, and appraised in 2012 (see below). Parkmead holds a 15% interest in the field.

December 2011
Acquires Stakes in the large Pharos Gas Prospect (Dana 50% & operator) and four UKCS gas basin blocks. The four blocks are in a prolific part of the Southern North Sea, between the producing Amethyst, Ravenspurn, West Sole and Hyde Fields. The blocks also contain the 47/10-8 gas discovery and several significant additional exploration targets.

The blocks are adjacent to Blocks 48/1a, 47/5b and 48/1c, also owned by Parkmead, and which hold the Platypus field and the Possum prospect. Both Platypus and Possum are structural traps containing a Rotliegendes age reservoir, which is the dominant gas producing horizon in the Southern North Sea. The Pharos prospect is also a structural trap with the same Rotliegendes reservoir. This structure has the potential to contain up to 500 billion cubic feet of gas in place and is currently being drilled as I write. The historical drilling success rate within this play has been very good. A discovery at Pharos could be jointly developed with the Platypus field, which is only 14km to the north east of Pharos. This would significantly increase the economic value of all three accumulations at Platypus, Possum and Pharos.

March 2012
Achieves first production by acquiring onshore stakes in four producing gas fields and two oil fields in the Netherlands. These include:
  • A 15% interest in the Andel V production licence, including two producing gas fields at Wijk en Aalburg and Brakel, and the Ottoland oil field development;
  • A 15% interest in the Papekop production licence, including the Papekop oil field development 
  • A 15% interest in the Drenthe III production licence (excluding Vinkega) and Drenthe IV production licence, which together include two producing gas fields (Geesbrug and Grolloo)

At the date of the acquisition production was approximately 2000 boepd (300 boepd net to Parkmead).
The successful extended well test performed on Ottoland during Q4 2011 produced oil at a stable rate from the existing single well on this accumulation. The acquisition provided Parkmead with two near-term development opportunities with the first of these due to come onstream in 2014.

In March 2012 Parkmead raised £8.5 million equity in an oversubscribed placing (61m shares @14p, a discount of 8.5%. Tom Cross subscribed for 24.5m of these shares).

May 2012
Acquisition of DEO petroleum, including it’s principal asset, a 52% interest (and operatorship) in the Perth field in the UKCS. The Perth Field, in licences P218 (Block 15/21a) and P588 (Block 15/21c), is targeting 2P reserves of 21.5 mmbbls (net to Parkmead) from a Phase 1 development. Parkmead is planning to drill an appraisal well targeting a further 50-100 mmbbls of OIP potential. They are seeking to maximise the reserves to be developed through the Perth Field infrastructure including potential tie-in opportunities in the Greater Perth Area. To this end, Parkmead is working with one of its partners, Faroe Petroleum whose acquisition of a 50% stake in the Lowlander oil field (which is located nearby to the Perth Field) means they could potentially put together a joint Perth/Lowlander development study.

Year end June 2012 results
Parkmead generated revenues of £2.95 million and a loss before taxation of £4.9 million.

August 2012
Strong results from the Platypus appraisal well announced. The well reached 14,175 feet on 19 June having successfully drilled a 3,100 foot horizontal section within the reservoir. The well delivered a significant flow rate on test of 27 mcf of gas per day, (4,500 barrels of oil equivalent per day). Parkmead has since been working with its partners to progress planning for the field development. They are hoping for a decision to proceed to commercial development without the need for further appraisal drilling. At the time Tom Cross commented:
"We are delighted to report successful and conclusive results from Parkmead's first well in the North Sea and will be working with our partners to move ahead with the development of the significant gas field at Platypus”
October 2012
Added significantly to its exploration portfolio following the UK 27th Licensing Round. Parkmead became operator of 25 blocks across six licences in three key areas. Parkmead has started its work programme across these blocks, which includes obtaining 2D/3D seismic data and detailed mapping. According to Parkmead they have also had early discussions with potential partners across some of the blocks.

December 2012
Oversubscribed placing to raise £15.9m (130m new shares @12.25p/sh, a 5.6% discount), with a further £3.4m raised through the conversion to equity of loans provided to Parkmead by Tom
Cross himself, providing total finance of £19.9 million. It is good to see Tom’s confidence in his own company reflected in this way.

Half year end 31 December 2012
Parkmead generated turnover of £1.97 million and a loss before taxation of £2.76 million.
  • Revenue increased 48% to £1.97 million (H1 2011: £1.33 million)
  • Total assets grew 199% to £40.0 million (£13.4 million at end 2011)
  • Net assets rose by 247% to £22.0 million (£6.3 million at end 2011)
23 May 2013
Acquires Lochard energy. Lochard owned a 10% interest in the producing Athena oil field, producing originally at a gross rate between 10,000 and 11,000 boepd. Following some pump problems the Athena field is currently producing at a rate of approximately 7,500bopd (750bopd net to Parkmead). The field’s partners (Ithaca Energy operator) are currently assessing the most appropriate remedial actions, which may include repairing or a work over of the existing well or the potential drilling of a new well. It sounds unlikely that production will be restored to its optimum level before Q2 2014. There is therefore the possibility of some remedial work and cost. However, since production commenced in Q2 of 2012 through to the end of the first full year Athena had produced over 3.6mmboe. Lochard's interest generated operating cash flow of £9m in the second half of 2012, so Parkmead’s deal could pay for itself in around a year. The acquisition:
  • increased Parkmead's 2P reserves to approx 25.2 mmboe
  • increased Parkmead's forecast production for H2 2013 by over 400% although this will have been affected slightly due to the pump issue.
  • provides Parkmead with enhanced revenues, earnings and operating cash flow, which in turn will assist  the development of Parkmead's other assets
1 October 2013
Pharos exploration well starts drilling. The Pharos gas prospect has the potential to contain up to 500 billion cubic feet of gas-in-place (86 million barrels on an oil equivalent basis) and is located in Blocks 47/4d, 47/5d and 47/10c. The Pharos structure is located only 14km south west of Parkmead's Platypus gas field, discovered in 2010 and successfully appraised in 2012 (see above). Pharos is mapped as a much larger structure than Platypus and has the potential to contain almost three times more gas-in-place than the targeted amount at the successful Platypus discovery. A discovery at Pharos would be highly valuable because it could be jointly developed with the Platypus gas field which flow tested in 2012 at a rate of 27 million cubic feet of gas per day (4,500 barrels of oil per day on an equivalent basis). This would significantly increase the value of the already economic development at Platypus. Data attained from the Pharos well will also provide a greater understanding of the remaining prospectivity in this area, which includes the Blackadder gas prospect in the adjacent block to the south of Pharos.

Future growth potential
The first share price catalyst is already under way - the Dana drill of Parkmead’s 20% owned Pharos exploration prospect, targeting potential GIIP of 500Bcf that could ultimately be developed in tandem with the nearby Platypus and Possum gas assets. Update on Pharos, November 2013 is that they have made a gas discovery. No news on potential size yet but great news. My blog on what this could be worth to Parkmead is here

Further growth centres on the Perth development. Parkmead’s 52% stake in the Perth field is its flagship asset. Perth offers Parkmead 21.5mmbbl (net) from its initial FPSO-based development phase, with further upside possible from a 14.4mmbbl (net) second stage and other neighbouring assets which may ultimately comprise a wider Perth hub development.  Perth partner Faroe Petroleum recently acquired a 50% stake in the nearby Lowlander field, which could be developed alongside Perth as part of a regional sour crude hub. Parkmead estimates there is in excess of 900mmbbl of sour crude OIIP potential in the fields surrounding Perth. An appraisal well is planned to spud in 4Q13/1Q14 at a gross cost of around £12m.

A recent broker report from Jefferies suggested that Parkmead is undervalued vs reserves metrics. They report that on enterprise value / boe multiples, Parkmead at $7.4/boe 2P looks undervalued versus their peer group (an average $11/boe). The lion’s share of Parkmead’s reserves come from the single pre-development Perth asset (21.5mmbbl). As the appraisal programme advances the valuation gap should close. At average 2010-13 North Sea M&A multiples of $12.7/boe Parkmead would be worth 22p/share.

Personally I see Parkmead as a predator, not the prey, so unlikely to see a takeover of Parkmead at this stage in their development. Jefferies value Pharos at 1p/share plus a 13% upside to SP on a fully derisked basis. They value Perth at 14p/share. The future potential has a lot to do with the reputation of Tom Cross and the board, and the quality of the deals that he is bringing in as Parkmead grows its production, reserves and acquisitions.

Whilst I originally moved across as part of the Lochard acquisition with the feeling that Parkmead was overpriced, and that they had got Lochard on the cheap with expensive paper, I now appreciate the fuller picture and am pleased to be part of a larger, professional outfit like Parkmead. The shares look fair value, but with nothing priced in for the current drill, future potential, or future deals that Mr Cross may be able to pull off and I believe they are unlikely to fall further unless something goes wrong with current production assets.

I do actually think that this could be Dana part 2 and may add on any dips!

Other references for interest:
Article on Parkmead – 12 deals in the mix and talking to far east oil companies:

Article about planning for a Perth field hub