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Is BowLeven PLC The AIM’s Most Undervalued Company?

Africa-focused oil & gas explorer BowLeven (LSE: BLVN) made a game-changing announcement last week. The company revealed that it had sold down its stake in a project off the coast of Cameroon, the offshore Etinde block.

The deal between Russia’s second-largest oil producer Lukoil and Africa-focused NewAge will see BowLeven receive $170m at completion of the deal and further $40m deferred cash payment on completion of appraisal drilling.

What’s more, an additional $40m will be received to cover the cost of two appraisal wells.

Plenty of potential oil

In total, the deal will net BowLeven $250m, or £150m for a 50% share of the field. Unfortunately, this deal will reduce the company’s interest in Etinde permit from 75% to 25%. However, the deal gives BowLeven one of the most sought-after commodities in the oil & gas world (after actual oil & gas of course): cash.

Actually, after this deal completes BowLeven’s cash balance will exceed the company’s current market capitalisation. For investors, this presents a huge opportunity. Indeed, with proceeds from the deal set to bolster BowLeven’s balance sheet by approximately £150m, the company’s cash balance per share will rocket to 46.3p — approximately 15% above current levels.

This is excluding the $34m cash balance reported by the company at the end of February. 

City support

City analysts believe that the recent farm-down deal is worth about 68p a share to BowLeven, including long-term benefits such as well development. Still, a 68p target price is a near 40% discount to BowLeven’s current share price.

Additionally, the cash from the deal gives BowLeven room to manoeuvre and develop its other prospects across Africa. The company has projects in various stages of development within Borneo, onshore Cameroon and Kenya.

However, as with all small oil exploration and production companies, BowLeven remains a risky investment. The company has yet to receive any cash from the deal, and it is possible that other prospects could fail to yield results. 

Moreover, there is still a risk that the farm-down deal will not go ahead.

Risks ahead

In a circular sent to shareholders this week, BowLeven explained that upon completion of farm-down, the deal was conditional on Petrofac scrapping the Strategic Alliance, which the companies signed during 2012, regarding the proposed Etinde development.

Moreover, BowLeven explained that:

“There will likely be a cost to the group’s withdrawal from the Strategic Alliance in order to pursue the Transaction…the group has entered into discussions with the Petrofac Group regarding whether and, if so on what terms, the Petrofac Group might be willing to agree to any such withdrawal.”

BowLeven is likely to face financial penalties for scrapping the alliance.

So, it would appear that while BowLeven does look attractive based on its discount to asset value, there is still a risk that the deal could fall through. Unfortunately, if the deal does fall apart, BowLeven could face hefty financial penalties.  

Risky business

All in all, BowLeven does appear to be undervalued at current levels but risks remain. If everything goes to plan for BowLeven, shareholders will be richly rewarded; although one thing to remember is that the oil business can make you rich, but it can also make you poor.

That's why the best investors build a portfolio with a combination of both risky oil companies and reliable dividend-paying stocks, reducing risk and allowing you to sleep soundly at night.

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Rupert owns shares in Petrofac. The Motley Fool has recommended shares in Petrofac.