Crown Ocean Capital proposals
COC’s proposals and our comments are summarised below.
Exhibit 1: COC proposals and Edison comments
COC comments (January 2017) |
Comments |
Return excess cash to shareholders. |
COC has not indicated what it regards as excess cash levels. Bowleven held $95m in cash as of December 2016. The development concept for Etinde has not been decided and the final design may well require material funding that is close to or exceeds Bowleven’s current cash position. The forward curve and funding in the oil & gas sector implies that little RBL facility may be available before first oil/gas and as such any material cash returns in the short term may be more than cancelled out by possible equity issues further down the line to obtain this funding.
Management had already put in place a modest buyback programme to return a limited amount of cash in a tax efficient manner. COC’s vote at the AGM blocked this programme from continuing. |
Create an alignment of stakeholders in the Etinde project (Etinde), Bowleven’s most valuable asset. |
It is not clear how the suggested restructuring would improve this alignment. |
Identify the route to value maximisation from Etinde over time. |
Bowleven is an active partner with the operator, but no longer has control over the concept and negotiations with the government. A restructuring would not affect this position. |
Citing material shareholder value destruction over many years, cease further spending on the Bomono project and conduct an independent review of the estimated $100m spent at Bomono to date. |
Oil exploration is by definition a risky and capital-intensive business and oil investors should be aware that exploration will often see failures resulting in losses. It is disappointing that the company has seen this money invested with no clear return as yet. Failures at Sapele, delays with the Etinde project and cost over-runs at Bomono are extremely unfortunate, but these are features of oil development. However, this does not mean that a return cannot be made from further investment in Bomono, if this produces positive returns. The company is currently in arbitration over the drilling spend at Moambe and Zingana at Bomono. |
Wholescale changes to the board required to counter: |
|
|
|
Bowleven is reducing G&A and has achieved 23% reductions so far, including cutting personnel and moving to smaller premises. |
•
Historically high cash outflows with no resulting production.
|
Nature of oil business implies some losses over time. The scale of losses is regrettable for investors, but this should not mean throwing out the baby with the bathwater. |
•
Board plan to acquire cash generating assets instead of cutting costs.
|
With a flat forward curve and still some assets available, it is entirely possible that Bowleven may make accretive deals as others remain in difficulty. The management has shown caution by not progressing with the Tanzanian acquisition and, according to the operational update, over 50 targets have been evaluated with no bid, suggesting prudence and thoroughness. |
Proposal to remove the entire board (except David Clarkson), and add two new directors (see bios below). |
The outcome of COC’s proposed board changes, if effected would be to leave Bowleven with a board of three (two COC appointees and David Clarkson). This creates significant challenges to effective corporate governance of the company and few (if any) safeguards for minority shareholders given COC’s (assumed) control over two thirds of its proposed board. As the biographies below indicate, it is not clear that either of the proposed new board members has the necessary experience to run Bowleven and no experience/relationships in Cameroon. |
Critical of management due to reduction of equity in Etinde to 20%. |
Within the oil industry, funding has to be gained, and this will require material reduction in holdings for E&Ps with no in-house cash flows. As a comparison, Rockhopper has seen its stake in Sea Lion fall materially since discovery, while Tullow (which has production) now has a fully carried development in Uganda, but holds only 10%. These are just two of many, many examples that we could cite – including how supermajors like BP and Exxon reduce stakes for funding and risk management purposes. |
New directors proposed by COC |
|
Eli Chahin (senior advisor to Alix Partners, a management consultancy). On board of the Al Jaber Group, a privately owned conglomerate. |
Consulting with an oil and gas company is different from running one, and we would look for further confirmation of Mr Chahin’s experience before making a judgement on his suitability to help Bowleven shareholders see value. |
Chris Ashworth (various legal roles, including partner at Ashurst, partner at Lovells and General Counsel at Knight Vinke). |
No indicated oil experience. |
COC comments (January 2017) |
Return excess cash to shareholders. |
Create an alignment of stakeholders in the Etinde project (Etinde), Bowleven’s most valuable asset. |
Identify the route to value maximisation from Etinde over time. |
Citing material shareholder value destruction over many years, cease further spending on the Bomono project and conduct an independent review of the estimated $100m spent at Bomono to date. |
Wholescale changes to the board required to counter: |
|
|
•
Historically high cash outflows with no resulting production.
|
•
Board plan to acquire cash generating assets instead of cutting costs.
|
Proposal to remove the entire board (except David Clarkson), and add two new directors (see bios below). |
Critical of management due to reduction of equity in Etinde to 20%. |
New directors proposed by COC |
Eli Chahin (senior advisor to Alix Partners, a management consultancy). On board of the Al Jaber Group, a privately owned conglomerate. |
Chris Ashworth (various legal roles, including partner at Ashurst, partner at Lovells and General Counsel at Knight Vinke). |
Comments |
COC has not indicated what it regards as excess cash levels. Bowleven held $95m in cash as of December 2016. The development concept for Etinde has not been decided and the final design may well require material funding that is close to or exceeds Bowleven’s current cash position. The forward curve and funding in the oil & gas sector implies that little RBL facility may be available before first oil/gas and as such any material cash returns in the short term may be more than cancelled out by possible equity issues further down the line to obtain this funding.
Management had already put in place a modest buyback programme to return a limited amount of cash in a tax efficient manner. COC’s vote at the AGM blocked this programme from continuing. |
It is not clear how the suggested restructuring would improve this alignment. |
Bowleven is an active partner with the operator, but no longer has control over the concept and negotiations with the government. A restructuring would not affect this position. |
Oil exploration is by definition a risky and capital-intensive business and oil investors should be aware that exploration will often see failures resulting in losses. It is disappointing that the company has seen this money invested with no clear return as yet. Failures at Sapele, delays with the Etinde project and cost over-runs at Bomono are extremely unfortunate, but these are features of oil development. However, this does not mean that a return cannot be made from further investment in Bomono, if this produces positive returns. The company is currently in arbitration over the drilling spend at Moambe and Zingana at Bomono. |
|
Bowleven is reducing G&A and has achieved 23% reductions so far, including cutting personnel and moving to smaller premises. |
Nature of oil business implies some losses over time. The scale of losses is regrettable for investors, but this should not mean throwing out the baby with the bathwater. |
With a flat forward curve and still some assets available, it is entirely possible that Bowleven may make accretive deals as others remain in difficulty. The management has shown caution by not progressing with the Tanzanian acquisition and, according to the operational update, over 50 targets have been evaluated with no bid, suggesting prudence and thoroughness. |
The outcome of COC’s proposed board changes, if effected would be to leave Bowleven with a board of three (two COC appointees and David Clarkson). This creates significant challenges to effective corporate governance of the company and few (if any) safeguards for minority shareholders given COC’s (assumed) control over two thirds of its proposed board. As the biographies below indicate, it is not clear that either of the proposed new board members has the necessary experience to run Bowleven and no experience/relationships in Cameroon. |
Within the oil industry, funding has to be gained, and this will require material reduction in holdings for E&Ps with no in-house cash flows. As a comparison, Rockhopper has seen its stake in Sea Lion fall materially since discovery, while Tullow (which has production) now has a fully carried development in Uganda, but holds only 10%. These are just two of many, many examples that we could cite – including how supermajors like BP and Exxon reduce stakes for funding and risk management purposes. |
|
Consulting with an oil and gas company is different from running one, and we would look for further confirmation of Mr Chahin’s experience before making a judgement on his suitability to help Bowleven shareholders see value. |
No indicated oil experience. |
Source: COC, Edison Investment Research
Up until the investment at Bowleven, COC was an investor in early-stage technology companies, a far cry from activist oil investment. With such little expertise in oil companies, it is not clear that the proposed new structure and management are capable of running Bowleven in the long term and helping it realise the material latent value in Etinde.
We also note that in the last three months, COC’s position on its support for the board and company strategy has moved materially, leading to questions about whether it could move again. We summarise the actions taken before Christmas below.
COC has increased its stake in Bowleven from below the 3% level at the beginning of 2016 to 15% now, becoming its largest shareholder in the process (now holding 49.8m shares). On 15 November, it tabled additional resolutions for discussion at the AGM, proposing the election of three new directors (at the expense of three existing NEDs), its first public statement on the company.
The requisition not accepted by BLVN for the AGM (held on 14 December), as both resolutions were defective under the Companies Act. At the time, BLVN reported that COC “expressed their confidence in the Chairman and the executive management of the Company and no requisitions have been made with regard to the Executive Directors of the Company”.
In November, BLVN stated its confidence in the experience and expertise of the three NEDs, which COC had proposed replacing, all of whom have spent many years working in the industry, either on the financial/banking side (John Martin) or operations and management (Tim Sullivan and Philip Tracy). Brief descriptions of the directors at that time proposed by COC (Breht McConville, Titus Gebel and Matthew Eugene McDonald) revealed very little (including no oil and gas experience).
Actions taken at the December 2016 AGM
As none of the COC resolutions were put for vote, the AGM had votes on the resolutions put forward by BLVN. COC voted against all eight of the resolutions (although it did not use all of its voting rights to vote against the re-election of the auditor or its remuneration). In particular, COC used its 42,539,208 votes to vote against the re-election of Kevin Hart (CEO) and David Clarkson (COO), as well as against (the standard resolutions) to adopt the annual accounts. Finally, it voted against authorising the directors to allot up to one-third of the share capital as deemed necessary. The net result was that all the ordinary resolutions were passed, but the two special resolutions (requiring 75% of the vote) were not. A summary of the vote is given below. All resolutions would have passed without COC’s votes.
Exhibit 2: Summary of results of AGM vote
|
|
|
|
This was clearly a yet another change of stance from COC – from seeking an MBO to stating its confidence in the executive in November to voting against the CEO/COO and against management’s freedom to allot shares to now supporting.
COC seems to have changed its position again – to support David Clarkson but stand against the rest of the executive and board.
