CA - Africa Oil Corporation Is Repurchasing Its Stock You Should To

2023-12-11 07:03:28 ET

Summary

• Africa Oil Corporation has a strong portfolio of assets and is debt-free with a cash balance of over $200 million.
• The company's core oil assets have a strong outlook, and it is part of the largest oil discovery of 2022.
• The company has the potential for strong cash flow and shareholder returns, but is at risk from weak crude oil prices.

Africa Oil Corporation ( AOIFF ) has dropped 25% from its highs, as the company has been impacted by a global downturn in oil prices. However, that's a temporary downturn in our view, as the company continues to focus on building out an impressive portfolio of producing assets. The company has recently won the green light for 10% of its outstanding shares over the next year , and as we'll see, you should be repurchasing shares with the company.

Africa Oil Corporation Foundation

The company has a strong portfolio of assets.

The main company (Africa Oil Corporation) is debt free with a cash balance of more than $200 million. It also has a credit facility of $175 million. The company has the cash balance to complete its entire 10% share buyback, and we think now, with the company's current share price is a great time to make that decision.

The company's Prime Oil and Gas has $255 million in debt, with a net debt position, but it's non-recourse to Africa Oil Corporation. The company has incredibly strong FCF and low operating expenditures, but with 2022 average Brent price at just over $100 / barrel, it was a much better environment for the company.

The company's core oil assets (OML 130) has strong outlook. The key for the company is to at least maintain production and cash flow here with minimal capital expenditures. In the Orange Basin, the company is part of the largest oil discovery of 2022. The key here is to see the company turn it into a profitable FPSO operation.

Africa Oil Corporation Catalysts

The company has a number of catalysts from its early positioning in a new oil province.

The largest discovery here was the Venus-1x wells. The company has a 6% stake in that block. It also has a 26.25% interest in the much larger block 3B/4B off of South Africa, where prospective resources for the block are 4 billion barrels. We'd like to see the development here proceed with FPSOs to get additional production for the company.

There are definitely positive proceedings for this block , and Namibia currently sees first oil for the block by 2030 . Whether that happens remains to be seen along with the timeline for FPSOs, but a single FPSO could add 15 thousand barrels / day of high profit production for the company. The breakeven for the company there could be $30-40 / barrel.

Africa Oil Corporation Financials

The company's core financial picture, as we discussed above, remains incredibly strong.

It also shows the company's dramatic financial improvement, as a result of higher oil prices. From the start of 2021, the company had more than $500 million in net debt, counting the parent company. At this point, combined net debt is now $50 million, a $500 million improvement in less than 3-years. That's massive for a $850 million market cap company.

That cash flow shows how the company can provide substantial shareholder returns.

Africa Oil Corporation Future

The future for the company is maintaining its existing production and finding new sources of high margin production as it focuses on Africa.

The company's first focus is to retain maximum optionality over Venus. Liza Phase 1 had a capital cost of $3.5 billion, and that's after ExxonMobil's impressive capital reductions . It wouldn't be surprising to see a $3.5-5 billion cost to get an FPSO at Venus. Africa Oil Corporation, with a 6% stake and a 30% stake in Impact, could afford the attributable $250 million.

However, whether the remainder of Impact could afford the remaining $500 - $600 million cost remains to be seen. The company has had a number of private placements, and Africa Oil Corporation has participated in all of them, however, whether it works remains to be seen. On Block 3B/4B, depending on the cost and cash flow, Africa Oil Corporation likely needs a farmout.

At the end of the day, the company will maintain its several % dividend, and we'd like to see additional share buybacks.

Thesis Risk

The largest risk to the thesis here is crude oil prices. Crude prices are weak right now. The U.S. is rapidly increasing production, setting new records, and across the world, demand is weak because of rising interest rates. Brent Crude prices are currently at roughly $75 / barrel, despite OPEC+'s best efforts. That could hurt future shareholder returns.

Conclusion

Africa Oil Corporation is a small oil company with an impressive portfolio of assets. The company is already generating strong cash flow from its core assets off of Nigeria. It's working to convert those assets into assets generating long-term, reliable, cash flow while working through Nigeria's various tax models.

However, the company also has numerous catalysts. The company no longer cares about Kenya, and it's left the asset. It's decided that the asset is not economical. The Venus-1X asset has billions of barrels of potential reserves, and Africa Oil Corporation has a 6% stake. That could result in strong cash flow, helping the company for the long-term.

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