Headlines
• In Brief:
o Baron Oil* (LON:BOIL – 0.35p) – Peru Payment Setback
o BowLeven (LON:BLVN – 36p) – Interesting Appointments
o Genel (LON:GENL – 58p) – Poor Reservoir Understanding or Management?
o TomCo (LON:TOM – 0.10p) – (HOLD – 0.33p) – Near Term Valorisation Hope Pyrolysed
In Brief
• Baron Oil* (LON:BOIL – 0.35p) – Peru Payment Setback: Today's news that the expected $2mm payment from Union Oil and Gas Group in respect of assignment of a 30% interest in Block Z-34 under the terms of the 2013 Farm-in Agreement has not materialised is disappointing, and precipitates a need for the management team to revisit its forward programme. However, we believe that the management team have contingencies in place for eventualities such as these and will adjust accordingly. While this is disappointing, it is not as terminal as the reaction in the market suggests, and given then remainder of the portfolio, we believe that this headwind will be offset in the near term.
• BowLeven (LON:BLVN – 36p) – Interesting Appointments: We note today's announcement from the Company, especially for the mention of Didier Lechartier as a potential directorial candidate. We believe that this is a message of intent from the activist shareholder as Didier has a good operating and business development pedigree, especially in Africa. While change and uncertainty can precipitate apprehension in investors’ minds, we believe that this appointment more than any other should be a strong positive.
• Genel (LON:GENL – 58p) – Poor Reservoir Understanding or Management?: While an impairment in volumes between 2015 and 2017 is expected given the decline in the oil prices, the scale and reasons for the write-down are staggering. That the Company hasn't mentioned reclassification (to Contingent Resources) underlines the scale of the problem that has unfolded. The question that the management needs to accurately convey to the market, and as a matter of urgency, is whether this has been a result of poor understanding of the reservoir, which would indicate that the initial volumes were too high, or whether this is a result of poor reservoir management, or as is most likely, a combination of the both. Once that is understood, it needs to be disclosed to the market, and the read across to its other assets addressed, as after the scale of the write-down, there will now be significant questions regar ding either the subsurface team, or the operating team, or most likely both.
• TomCo (LON:TOM – 0.10p) – (HOLD – 0.33p) – Near Term Valorisation Hope Pyrolysed: While we can understand the search for alternative extraction techniques to valorise the shale oil series, we cannot see how this investment will bring this any closer to fruition for the Company's shareholders. These technologies have been tried, tested and researched for a long time, and while there will always be a niche for these technologies in one form or another, we do not see these "in-situ" solutions having commercial application due to the issues of scale up, due principally to heating essentially "open systems." That said, however, we do believe that there is merit to some of these technologies being tested "ex-situ," which must now be the focus. Whatever the solution is, it is irrelevant unless it is economic, which must be the only focus. Given that the revenue generating valorisation of the Contingent Resource can now be pushed out a further 8 years (at least), to 2030, and the Company has elected invested in to what is essentially nascent technology, we believe that any value accruing to the shareholders will now be overshadowed by fears and successive funding rounds. Given this, we believe that there can be no realistic chance of value being created in the near term, we are moving the shares to a HOLD.