Bowleven PLC to Discuss Etinde Farm-out Agreement Signed with LUKOIL and NewAge Call
Jun 24, 2014 AM EDT
LKOH.MZ - NK Lukoil PAO
Bowleven PLC to Discuss Etinde Farm-out Agreement Signed with LUKOIL and NewAge Call
Jun 24, 2014 / 09:45AM GMT
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Corporate Participants
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* Kevin Hart
Bowleven plc - CEO
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Conference Call Participants
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* Rafal Gutaj
BofA Merrill Lynch - Analyst
* Alessandro Pozzi
Barclays - Analyst
* David Farrell
Macquarie Research - Analyst
* Will Forbes
Edison - Analyst
* Charles Vaughan
Dundee Securities - Analyst
* Divaji Hosseini
Tudor Pickering Holt - Analyst
* David Round
BMO - Analyst
* Mark Henderson
Westhouse Securities Ltd. - Analyst
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Presentation
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Operator [1]
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Good morning ladies and gentlemen, and welcome to the Bowleven call on the Etinde farm-out transaction. For your information, this conference is being recorded. This morning's call will be led by Kevin Hart, Chief Executive of Bowleven. (Operator Instructions). At the time, I would like to turn the call over to Mr. Kevin Hart, please go ahead sir.
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Kevin Hart, Bowleven plc - CEO [2]
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Morning, everybody. First of all, apologies, if I start yawning, I'm not bored. It's the fact I've just flown in Cameroon and on the bounciest flight ever, so I'm running on no sleep at the moment and no caffeine, which is never good.
The purpose of the call today is really update everybody in respect of the transaction we announced this morning. You'll have seen we've entered into a conditional agreement with NewAge/LUKOIL to dispose of two-thirds of our existing position in Etinde in return for a gross consideration of $250 million, as split $210 million in cash and $40 million in respect of two appraisal well carry in respect of the Etinde acreage.
I'd highlight probably the following [key] areas as why we see this as an excellent deal for Bowleven.
Firstly, it gives us the opportunity to accelerate the appraisal of the interest at Isongo. The IM-5 well really opened a Pandora's box in respect of Intra Isongo, where we have at least three large stratigraphic channels that we've identified that need further appraisal in order to ascertain just how big the prize is there.
So whilst we're giving a bit of the cake away, we're pretty hopeful that we can make the cake a damn sight bigger as a consequence of that appraisal drilling. And I know that certainly in the LUKOIL announcement today that it's the intention that those appraisal wells will be drilled in 2015, which I think is consistent with all parties.
It also provides the cash to fully cover us for our residual share, in terms of development costs. And not only that, it lets us to get on with what is really the life blood of Bowleven historically, which is (inaudible) exploration.
So as a consequence of today's transaction, in addition to accelerating the appraisal of Intra Isongo, covering the development costs, it will also provide us with the balance sheet strength to progress pretty aggressively on Bomono, drilling two wells there.
We're in pretty advanced discussions in respect of a rig contract and [linked] farm-in on that acreage, which would enable to draw those wells and commence a two-well program prior to the end of the year.
And then finally, of course, and not least, we have Kenya in the hopper, where we're just about to award to the 2D seismic contract. And we've got the twinkle in the eye, which is Zambia and we're looking past that.
So overall, it really lets us take all our assets forward, fully funded from where we are.
Some of the detail, the deal itself is conditional on government approval in Cameroon. We've been through that process twice before, once with [DiTOIL] and then the (inaudible). It's a well tried and tested process.
And finally, we also need shareholder approval. So we'll be providing a circular to the shareholders in due course, which should be posted within seven days of the announcement.
Other loose ends, clearly this deal isn't compatible with the arrangements we currently have in place with Petrofac. And the strategic alliance agreement doesn't actually envisage this kind of termination event. We're already in discussions with them, as to how to move it forward.
There's a $50 million break fee in the event of a corporate takeover, which doesn't really apply in this instance. So we'll be having a conversation as to how best to remedy things, such that the strategic alliance would be terminated.
Maybe just a few words on LUKOIL, I'm sure you all know who they are, they're $53 billion company. It begs the question, I suppose, why would then enter into Cameroon? And why would they come into the Etinde acreage? I hope the answer to that's pretty self-evident.
Firstly, they see the upside in Intra Isongo, which we all believe is a world-class opportunity but requires further appraisal. And secondly, they clearly think there's a commercial project there, over and above just fertilizer. I think everybody's got an eye on an LNG scheme as an augmentation to the fertilizer plant.
So where we are. We think we sold two-thirds of our interest in Etinde for something in excess of where [it] (inaudible) last night. We've retained [Etinde upside], which is a down sight more realizable, now we've got funding to do in terms of appraisal drilling. And we've got the opportunity to move all the assets, not just Etinde, forward for the foreseeable future.
So hopefully, you'll all agree with us that we think it's a pretty good transaction. But I'll pass across for questions.
Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions). Rafal Gutaj, Bank of America.
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Rafal Gutaj, BofA Merrill Lynch - Analyst [2]
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Three questions, please. Firstly, could you just discuss how soon you think you could get a rig to drill the appraisal wells on IM-5? And could you just remind us of the anticipated costs to drill these wells?
Secondly, on Bomono, if there's any delays to the farm down here, would you still risk these wells by the end of the year, to avoid the $60 million penalty?
And then finally, the severance payment you referred to as being $50 million with Petrofac on the strategic alliance, you mentioned it doesn't apply here. But could there be any compromise by virtue of using Petrofac for the FID studies for the development to mitigate any severance payment? Thanks very much.
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Kevin Hart, Bowleven plc - CEO [3]
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I've taken them in order. Wells. Typically when we've gone out to contracts for drilling wells in Etinde, the lead time typically from going out -- the twinkle in the eye to spud is probably somewhere in the region of six to 12 months. It really does just depend on that rig availability.
Clearly, that's one of the first things we'll be looking at as a joint venture as soon as this deal completes. So part of it will be linked into the timing of the completion as well.
It's certainly all our expectations, I believe, that we'll be drilling in 2015 and clearly the earlier in 2015 we can manage, subject to the usual caveats of safety, the better. So that's the first part of that question.
The second part in relation to the cost of the wells. I think what we're looking at in terms of appraisal locations is very much focused on the Intra Isongo level. So above the middle Isongo, which is where the higher pressure resides. So I would have thought $40 million would fully cover the cost of two wells -- our net share would fully cover the cost of two wells on testing, which is the basis on which that number was derived.
And in respect of Bomono, we are actually in the -- a very, very long way down the track in terms of securing a rig for that. And, as part of that rig contract, it's likely that the rig supplier would get part of the acreage or take an equity position in the block alongside us. I don't want to say too much yet until it's finalized.
In the event that fell away, yes, it certainly gives us the opportunity, if we wanted to do so, to go ahead and actually carry out 100% position on those two wells, if required.
Technically, we've always liked Bomono, and we think it's an asset that certainly deserves drilling. With it being onshore and with the rig identified, we've got a pretty good handle on what the likely cost is there. So it's well within our auspices, given this transaction, to be able to do that.
And finally Petrofac; yes, Petrofac we'll have to see whether -- obviously, Petrofac have been involved with us; we've enjoyed working with them so far on the project. Their future involvement going forward for FID, etc., will be subject to the usual bidding procedures, I presume, for the production-sharing contract. But I'm sure they'll be one of the guys on the invitation to tender list when we go out the door with it.
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Rafal Gutaj, BofA Merrill Lynch - Analyst [4]
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Okay, that's clear, thanks.
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Operator [5]
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Alessandro Pozzi, Barclays.
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Alessandro Pozzi, Barclays - Analyst [6]
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Congratulations for the transaction. Just wondering if you can give us a bit more color on the progress to FID and what are the next key milestone before you take FID and the timing of those?
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Kevin Hart, Bowleven plc - CEO [7]
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Yes, in terms of the FID, not much has moved Alessandro. We're pretty active still on the gas sales negotiations, which is the next key milestone.
I think from our side we regard the decree coming out of the Presidency as, based on previous experience, that is pretty much just general procedure; so it gets gazetted is in the newspapers over there.
So really the next thing to knock off in terms of our side of the equation and the fertilizer project is finalization of our gas sales agreement. We're in the process of negotiating when it's going to be for, hopefully what will be, the final round of that going forwards. No real update from what was out there previously.
Clearly, when we do transactions like this, there might be a bit of delay, as a consequence of the change of the guard. But I think that's probably fully reflected in any price that our friends have put on the table in respect of the transaction.
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Alessandro Pozzi, Barclays - Analyst [8]
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Right, cool. And in terms of appraisal wells, so the two appraisal wells will be targeting the IM or maybe are you thinking of doing something on the IF field as well?
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Kevin Hart, Bowleven plc - CEO [9]
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No, I think very much I think NewAge, ourselves and LUKOIL are thinking here is that the Intra Isongo and we recognize this as soon as we drilled into it. We drilled a 70-meter sand with a hydrocarbon (inaudible) in what is a very expensive stratigraphic player.
Off the top of my head we're talking about that one channel alone that one channel alone that covers 50 square kilometers or 60 square kilometers. And we think we've got three (inaudible), and there's certainly one location that we've discussed where we'd actually be able to penetrate all three locations, with a single well.
Now as part of the ongoing negotiations and discussions with the GDF LNG project we've actually had Netherland Sewell work alongside us as well, to look at what the kind of appraisal, locations, we [might want] to be thinking of.
And certainly there is a potential, and it always has risk, but there's a potential if the hydrocarbon column does indeed continue down, there's a pretty significant additional volumes to our current position.
And it's that in a way that really attracted us to this kind of deal, because we're not saying we don't like Etinde; in fact, the exact opposite, we like it a damn sight more than we've ever done. But when you're a relatively small company and you need to do the acreage justice, and to fund to fully funded appraisal wells, it requires relatively deep pockets. And as soon as we discovered the Intra Isongo I think we recognized that we needed some help in that regard.
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Alessandro Pozzi, Barclays - Analyst [10]
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Okay, that's clear. And a final question on NewAge. I guess you're confident they're going to do a good job when they take over operatorship.
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Kevin Hart, Bowleven plc - CEO [11]
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Joint ventures are joint ventures. I think LUKOIL will also bring a lot to the table. NewAge, may be not directly as NewAge, but if you look at the personnel involved, they've got extensive experience elsewhere in the world of major developments. And in this day and age, as you know, the outsource model in respect of contracting works pretty well.
So these guys have had experience historically in managing those kind of contractors. So I think they'll do a good job, but I also think LUKOIL will not, by any means, manner or description be a silent partner. I don't think that's what they're in for.
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Alessandro Pozzi, Barclays - Analyst [12]
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Right, fine.
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Operator [13]
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David Farrell, Macquarie Research.
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David Farrell, Macquarie Research - Analyst [14]
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Two questions from me please. Firstly, could you just expand upon that last question by Alessandro regarding NewAge? Can you just talk about some of the developments that they've been involved in historically?
And then the second question is, obviously, management clearly spending a lot of time on Etinde over the last few years, it's likely to free you up somewhat. How do you think of that in the context of the current portfolio and adding further acreage positions? Thanks.
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Kevin Hart, Bowleven plc - CEO [15]
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Can I take the second one first? Thank you for recognizing we've spent quite a lot of time on Etinde. If you look (inaudible), and it's been a hard road on Etinde, because we've always been limited by the ability to find the gas market and that's been the major challenge we've had on Etinde.
I think now, given the evolution of the fertilizer project and the LNG project or alternative projects that are out there, I think we're starting to finally see Etinde come to fruition in terms of reaching its actual potential.
So I still think we'll be spending quite a lot of time of Etinde, to be honest with you.
Kenya is starting to get to the interesting point in the equation. Time will tell what the two (inaudible) frees up, and we've actually got a very large acreage swathe within Zambia.
Having said that, I think I've got a world class new ventures team that historically have cut their teeth through (inaudible) and have done a good job here.
So I wouldn't say we would (inaudible) further farm-in opportunities, if and when they arise, and now we've got a balance sheet that gives us the opportunity to do so. So that's that.
On the NewAge front. NewAge is run by a Chief Exec, a guy called Steve Lowden who used to be head of, I think I'm correct in saying Marathon's upstream operation. And his lieutenant, Dave Loran, were jointly responsible for LNG projects, both in Russia and also the one on Equatorial Guinea, the Bioko.
So if you look at that team, they've certainly cut their teeth on some fairly large development projects historically.
And prior to that Steve, in a previous life, I think I'm correct in saying, was Operations Director at Premier, in respect of a number of developments there as well.
So I've got no doubt the team are perfectly qualified to go ahead with the development.
Lukoil, of course, are a slightly different kettle of fish. They currently operate 2.2 million barrels of production a day. And I think I'm correct in saying they account for something like 1% of the world's oil reserves. So there's no doubt that they will bring something to the party in terms of their own experience.
I think I'm also correct in saying that nowadays they actually operate about 400,000 barrels of production out with Russia. So they've certainly become quite a meaningful international player as well.
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David Farrell, Macquarie Research - Analyst [16]
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Sorry, just one final question, are there any taxes payable?
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Kevin Hart, Bowleven plc - CEO [17]
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No, we don't think so. We, obviously, never say never; certainly, as the industry has found out on a number of occasions recently. But given some of this is going to be -- certainly, look to be reinvested in the country, and given what we've spent historically, we think that there is no tax liable on this transaction.
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David Farrell, Macquarie Research - Analyst [18]
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Okay, brilliant, thanks very much.
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Operator [19]
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Will Forbes, Edison.
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Will Forbes, Edison - Analyst [20]
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A couple of questions if I can. Could you give a little bit of background about when you first looked at Lukoil and when discussions started? And whether this deal was in any way motivated by Petrofac's stepping away from funding these kind of projects. Then when do you expect the deal to close?
And then thirdly with regards to the deal and the Petrofac part of it, do you think that that will be terminated before Lukoil deal is closing? I'm just wondering in the instance where the Lukoil deal falls through, would you still be able to fall back on the Petrofac deal?
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Kevin Hart, Bowleven plc - CEO [21]
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Yes, just taking the last one, we would -- obviously, we need to speak to Petrofac, and I can't speak on their behalf. We'd look to structure something whereby termination is coincident with the completion of the transaction with Lukoil.
So if, for whatever reason, Lukoil didn't go through, and I think that's highly unlikely, given our experiences with previous transactions in Cameroon, then we would have a backstop position.
In respect of the timing, it's happened pretty quickly, to be fair. I think it's in the asset itself, so it's easy to get your head round fairly quickly in terms of where we are in the commercial agreements and, also, where we are technically, because there's a hell of a lot of good work being done.
So I think I'm correct in saying historically we've always represented that we thought that the attractiveness of the acreage would increase once we got EA approved. And I don't think it's a great surprise that the timing is now once that EA has been awarded.
So we've not been discussing some months, put it that way, we're [always] talking weeks.
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Will Forbes, Edison - Analyst [22]
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Okay. I just have some follow up on the appraisal wells. With a carry of $40 million net to Bowleven that implies two wells of $160 million, so $80 million each, that's a fair bit more than the $60 million cost of IM-5. And just wondering that seems fairly generous and therefore good for contingency plans, is that fair?
And then the second thing is, would you expect these appraisal wells to potentially be turned into producers if they were successful, and therefore reduce the overall CapEx for your part of it?
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Kevin Hart, Bowleven plc - CEO [23]
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Yes, two observations: one, clearly, the cost of the wells will depend ultimately on a number of factors. But, when we arrived at the number of $40 million, we felt that that was a fair reflection of a tested well.
Now, we'd expect some of these wells that we have to carry out some reasonably extensive testing, now given the stratigraphic nature we're looking at there. So that kind of links to that.
Basically, the design of those wells, it always makes sense, if you can do so, to design them as keepers. And I'd be very surprised if NewAge, when they fill our shoes, don't do exactly that, which is look at completing these wells in (inaudible) successors as producers.
We know from IM-5 they're pretty prolific in terms of productivity, so it would seem slightly crazy if we did drill a good well, or two good wells for that matter, not to complete them as production wells down the track.
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Will Forbes, Edison - Analyst [24]
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Okay, thank you very much.
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Operator [25]
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[Charles Vaughan], Dundee Securities.
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Charles Vaughan, Dundee Securities - Analyst [26]
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(inaudible) whether the GSA is -- needs the environmental permit to come through before it can get completed. Are we still waiting on that first, as a sequence?
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Kevin Hart, Bowleven plc - CEO [27]
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No, the GSA -- the GSA is independent of the environmental permits. The GSA can be signed conditional upon FID, which is how it's currently structured.
So yes, they are two separate issues. One clearly is to get to FID, you need to make sure you've got all the planning permission in place, and that planning permission includes the environmental impact permits.
But the GSA itself will effectively accommodate that by having it conditional upon the FID position.
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Charles Vaughan, Dundee Securities - Analyst [28]
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Okay, yes, thank you.
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Operator [29]
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(Operator Instructions). [Divaji Hosseini], Tudor Pickering Holt.
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Divaji Hosseini, Tudor Pickering Holt - Analyst [30]
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Just a quick question. What will the proceeds of the farm-out be used for?
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Kevin Hart, Bowleven plc - CEO [31]
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Really, just -- I don't know if you heard the start of the conference call, but in terms of the $210 million, clearly, as a consequence of this transaction, we will be terminating the Strategic Alliance Agreement. So we'll have to reserve a fair chunk of that in respect of our share of the development going forward, which will be 20% of the gross development costs, assuming that the government backs in. And I think we're pretty confident that will be the case.
But it will also be available to us to move forward with Bomono, to obviously look at drilling wells in Kenya in 2015/early 2016, depending on the outcome of the seismic; and also, to move Zambia forwards as well.
So really, we're in a nice position, post-completion here, where we're fully funded for two appraisal wells in Etinde. We're fully funded for the development cost of our share of the initial development on Etinde. We're funded for a two-well drilling campaign on Bomono. And we're funded also in the event we want to go ahead and build wells in Kenya in the second phase, in the event we decide to go there.
So really, in terms of a relatively small E&P company, I don't think you could wish to do better from this, given the state of the market and the opportunity we've got. And there's not one of those assets we wouldn't want to apply capital to because at the present we think they've all got significant merit.
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Divaji Hosseini, Tudor Pickering Holt - Analyst [32]
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Perfect, thank you.
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Kevin Hart, Bowleven plc - CEO [33]
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The one final thing I'd say on that, of course, is that that's assuming equity funding of the entire position there. In reality, once we get to FID, we're pretty confident with the Bomono development will have some debt capacity against it.
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Divaji Hosseini, Tudor Pickering Holt - Analyst [34]
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[Right], thank you, very good.
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Operator [35]
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David Round, Bank of Montreal.
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David Round, BMO - Analyst [36]
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Just a quick follow up, or, actually, a clarification on an earlier question.
I think the previous governance was for a gas sales agreement in H1 and FID by the end of the year. You mentioned some delay, changing partners, but what is your current expectation with respect to timing? And can we infer anything from the timing of this deal?
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Kevin Hart, Bowleven plc - CEO [37]
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No, I think, as I say, it really is the logistics of getting around the table on the GSA at the moment. I know we've got a conference call, all-parties conference call this week, and we're trying to get a date in the diary as soon as possible to actually meet in [S&R] in London to go through the GSA again. And it's in pretty good nick.
The FID part, as we've said all along, is still dependent upon the outcome of the financing closure on the Ferrostaal side of things. It's just an observation, but I would argue that financial close is a bit easier with having LUKOIL as one of the counterparties, than maybe just us and NewAge in terms of credit risk.
So I think this transaction itself will help things. It may slow things down slightly but certainly, based on the conversations we've had on our side, we're full guns blazing for FID as quickly as we possibly can.
And certainly, from the guidance we've had so far from the other side, the target is still the end of 2014. But it wouldn't be unrealistic to see it slip into 2015, and I think LUKOIL, when they've looked at the valuation together with NewAge, will fully have factored in some further slippage in the FID process.
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Operator [38]
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Mark Henderson, Westhouse Securities.
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Mark Henderson, Westhouse Securities Ltd. - Analyst [39]
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Well done, guys, on the news this morning; very helpful.
I think you kind of stole my thunder, Kevin, to be honest with you. I just wanted to ask, actually, on your allocation or your application of funds you highlighted funding the 20% share of the development. But presumably you will be able to development fund or debt fund some of that. Potentially, what would we be looking at? Up to 50% of your share development costs you could debt fund?
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Kevin Hart, Bowleven plc - CEO [40]
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Yes. When we've looked at this previously, and Terry and the team way back when, when we looked at getting expressions of interest with [terms] from banks, you are typically looking in this market at a 50% debt/50% equity ratio between the two. And I think that's -- you've probably seen stuff very close to that in terms of the North Sea funding and elsewhere.
This is a very bankable project with a sensible counterparty risk in respect of the fertilizer, but which is ultimately underpinned by the value of the liquids.
As I say, having LUKOIL in the consortium, I don't think, does us any harm either.
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Mark Henderson, Westhouse Securities Ltd. - Analyst [41]
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And then just very quickly, you may have mentioned this already. You talked about now being able to crack on with the two wells on the Bomono permit. Those are to be drilled by the end of this year, is that correct?
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Kevin Hart, Bowleven plc - CEO [42]
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Yes, the way the PSE works is that if you've commended operations before the yearend, you get a six to 12 month period in which to complete those operations. So what we've said all along is that we'd like, at the latest, probably, to sign the contract in maybe August/September time.
The two sites have -- well, the one site is completely prepared. The other one's in the process of finalization on the preparation. So, realistically, we'll be looking to spud those, hopefully, November/December at the latest, with a view to drilling them back to back.
They're relatively short wells, they're relatively shallow, but technically we think there's a good chance we'll find, hopefully, gas condensate and oil. In the event we were to find gas there, we're pretty well situated to supply gas into the indigenous power generation market, which would be the most likely outcome in the event of a gas discovery (inaudible).
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Mark Henderson, Westhouse Securities Ltd. - Analyst [43]
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All right. And at onshore oil wells, what are we looking at? 15 million or so each?
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Kevin Hart, Bowleven plc - CEO [44]
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I don't want to steal anybody's thunder, in terms of the rig contract and the deal we're discussing, but it would be considerably less than that for the two wells.
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Mark Henderson, Westhouse Securities Ltd. - Analyst [45]
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Okay, good; yes, thanks a million.
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Kevin Hart, Bowleven plc - CEO [46]
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Okay, well, if -- go on, sorry.
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Operator [47]
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Thank you for your questions. I will now pass you back to Kevin Hart for any closing remarks.
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Kevin Hart, Bowleven plc - CEO [48]
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Well, thanks for your time, everybody. I think, as [I said], it's not the easiest of markets out there, and when you're negotiating a farm-out transactions against a relatively depressed share price, it's always difficult.
But I'd have to just say thank you to all the team, who have done a great job, I think realizing, effectively, more than your market capitalization for two-thirds of one of your assets in this market is a great accolade to everyone who's been involved in it. And we'll look forward to having NewAge and LUKOIL in as partners going forwards.
Really, to my mind, the key here is not just about what we're giving up. It's actually about what we're actually hopefully going to create as a consequence of the funding and, certainly, the appraisal drilling on Etinde. So thank you for your time.
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Operator [49]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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