Key points:
- Perenco replaces New Age as JV Partner in Cameroon
- This could bring Bowleven's $25 million payout closer
- But how much closer, what's the additional value?
Bowleven (LON: BLVN) shares are up 40% this morning on the back of an announcement about a partnership change. Their JV partner in the Etinde project is to be, effectively, replaced. This brings in a substantial new partner to the operation and thus increases the chances that Bowleven will get its payout.
The Bowleven news is that they have that joint venture project at Etinde in Cameroon. This is in conjunction with Lukoil (the firm is not directly sanctioned at present) and New Age (African Global Energy). Bowleven is something of a passive partner in this project at present, it is New Age conducting the actual exploration and or drilling.
There's a balloon payment in the system for Bowleven, reach a certain stage of development and there's a $25 million payment due. This is not unusual at this sort of stage of a hydrocarbons project. Those who did the initial work might well sell on, or JV, a project in return for stage payments as milestones are reached.
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The issue with such a balloon payment is that of course the payment stage does in fact have to be reached. Here's it's dependent upon the “final investment decision” or FID. Will the field actually be developed? If so then those, like Bowleven, who did some of the initial discovery work are due that next payment. This matters for Bowleven shares of course, for $25 million is a significant multiple of the £8 million market capitalisation at present.
The move from New Age to Perenco being that JV partner pushes along the project – thus brings closer that payment milestone – in two different ways. The first is that Perenco, family or not, is seen as a more competent and advanced partner than New Age. Given Perenco's other interests in Cameroon and hydrocarbons we might expect rather more pushiness in advancing the project.
The second is that Perenco has of course paid New Age for that exchange of control. Which means that we've now a mid-level oil company, one well versed in the ways of Cameroon, who thinks that the project is sufficiently advanced and interesting to buy into it. This can be seen as a vote of confidence in the idea that Etinde really is going to get developed. And thus brings that $25 million balloon payment to Bowleven that bit closer.
The big question is how much further is this going to go? Because that $25 million is indeed that significant multiple of the Bowleven share and corporate valuation. But of course that Perenco has taken over from New Age does not create a 100% certainty that the milestone will be reached, the FID taken and the payment triggered.
So the calculation has to be that the probability of the payment has increased, but by how much? Is a 40% rise in Bowleven shares enough to account for this rise in the probability? For the expected value of the $25 million is that sum times the probability that it will happen.
That's the calculation that has to be done to determine any trading position.
