2023-12-14 01:43:59 ET
Summary
- Afentra plc has successfully closed deals to purchase stakes in oil production block 3/05 in Angola, with only 12% remaining to be closed.
- The company acquired assets worth $255 million with a clean balance sheet and only $37.4 million in cash.
- CEO Paul McDade and his team used smart deal bargaining and contingent consideration to create value for shareholders despite the long deal-closing wait.
My last article on Afentra plc ( OTCPK:STGAF ) in August 2022 looked at the sale and purchase agreements signed with the government of Angola in April 2022 for 20% of oil production block 3/05 in shallow water offshore Angola. The deal completion was much anticipated but more than a year and a half has since passed and finally, after much shareholder anguish, the Angolan Government approved the deal to purchase 14% from state oil company Sonagol in November and the deal closed formally on December 8 th to much relief in High Holborn House, London. With the 14% Sonagol stake and a further 4% of the same block from Croatia’s Oil company INA now closed, there only remains 12% more to close from the ENI / BP Joint venture company, Azule Energy which is expected to close early in the new year. The 30% total stake has an independent NPV10 valuation from ERCE of $255 million! Afentra started their deal hunt with a clean balance sheet and only $37.4 million in cash. How was such a feat possible? This article will show how CEO Paul McDade, (former Tullow Oil CEO) and his team of mostly former Tullow Oil executives , CFO Anastasia Deulina and COO Ian Cloke have worked efficiently with smart deal bargaining, creating value for shareholders despite that long deal-closing wait, and I will touch upon the company’s plans to ‘rinse and repeat’ the same methodology on their next acquisition, which some shareholders expect to come sooner rather than later. This article will show the value created by the Angolan deals for Afentra shareholder and the cash flow machine Paul McDade has created and will look at McDade’s chances of pulling off a similar feat in the coming months.
Delays
They say time is a great healer but nothing trumps effective-date barrels and contingent payments in the deal-making space! Deal closing was originally hampered by drawn-out negotiations on Block 3/05 economic terms intertwined with the block’s crucial term extension from Summer 2025 to 2040 which, for Afentra, was a condition precedent to the Sonagol deal (14%) completion. That hurdle thankfully fell in April 2023 and the smaller INA stake (4%) closed in May 2023. In July 2023 an opportunity arose for Afentra to acquire an extra net 6% of Block 3/05 by purchasing 12% from Azule Energy and simultaneously changing the original Sonagol deal from 20% to 14% to maintain the Sonagol JV control on the block. That delayed the approvals process further and only on November 9 th , shareholder angst was alleviated greatly when Afentra announced that the Government had approved the Sonagol deals, which paved the way for its subsequent completion on December 8 th . So how, with $37 million in cash and a clean balance sheet, did Afentra acquire assets worth $255 million?
Crucially, the effective dates of all the deals, (INA (4%, closed), Sonagol (14%, closed), Azule (12% to be closed in Q1)) were set at September 2021 for INA, April 2022 for Sonagol and October 2022 for Azule, so despite delays in closing the conditions precedent, barrels were accruing to Afentra’s credit all along! Time and patience were paying for the deals! Indeed Afentra secured a debt facility in Summer 2022 totalling $110 million to assist in acquiring the assets but on December 8 th Afentra guided that year-end net debt after acquiring both the INA (4%) and the Sonagol (14%) stakes, was to be only $20.7 million whilst to more than offset that, crude oil inventory would be around $22.5 million, essentially confirming that only a timing difference to the next inventory lifting stands in the way of Afentra having close to zero net debt with assets valued at NPV10 $255 million on their books. On December 10 th they also confirmed that the Azule deal was due to complete in Q1 2024. In the September webcast Paul McDade (at minute 16:30) confirmed that although the Azule deal had a later effective date of October 2022 vis-à-vis the Sonagol Deal effective date of April 2022, its bigger cost pool and smaller contingent consideration more than outweigh the six-month loss of effective date.
Firm and contingent consideration profile:
Along with back dated effective date barrels accruing to Afentra, McDade cleverly uses contingent consideration (“CC”) to give the seller some upside in the event of prolonged oil price upside whilst protecting shareholders in prolonged middle to lower oil price periods (the breakeven oil price is $35 on the field).
- The 4% INA deal CC is $2m per annum (over three years) if Brent exceeds $65.
- The 14% Sonagol Deal CC is a $3.5m per annum bullet payment (over 10 years), if Brent exceeds $65.
- The 12% Azule Deal CC is only paid out if Brent exceeds $75 in a given year plus it's on a sliding scale ($0 to $7 million) where a contingent payment of $7m (over three years) would require a Brent price of $120 to persist within years 1 to 3.
Free cash flow machine!
On September 20 th , in this webcast to shareholders , Paul McDade confirmed (at 5 minutes 20 mark) that Afentra’s free cash flow at $75+ Brent per barrel and after CAPEX would be circa $50 million and indeed it would be more given the higher oil prices that have persisted ($100 average Brent in 2022 and circa $80 average Brent in 2023).
“But if they’re producing $50 million free cash flow per annum then surely the field is depleting fast?"
The recent ERCE competent persons reserves report indicated an increase in reserves, showing a reserve replacement is 150%.
The Block 3/05 field has 3 billion barrels in place and McDade and his team are going to bring their previous North Sea shallow water expertise to the fore to increase the recovery factor through low CAPEX interventions like replacing gas lift , acid washing, and reinstating old wells and Electrical Submersible Pumps (“ESPs”) which assist in replacing the gas lift and significantly enhance liquids production, improving the power reliability on the field and increasing water injection. McDade touted the elimination of flaring on future satellite developments, thus decarbonising the asset by tie-ing a pipeline into an LNG facility. McDade estimates here (at 11 minutes and 5 seconds) that these satellite developments could add 10,000 barrels per day to the 20,000 barrel per day field.
The Opportunity – A high cash yield and future deals with a focus on further value creation
With an estimated free cash flow of $50 million per annum, minus perhaps $7.5m in annual (for three years only) Brent linked contingent consideration payments and with only 220 million shares in issue, Afentra on this current asset alone will be generating in the region of $0.19 per share in free cash flow. Not a bad result given the current share price is about $0.38 (£0.30) .Management aim to re-invest the cash in other asset deals in Africa with the emphasis on value creation as opposed to scale. Value creation in plain speak is not issuing unnecessary shares and rinse and repeat the same method of effective date barrels and other contingent or milestone-based considerations. When asked in a recent webcast here (at minute 14) what the profile of the next deal could be McDade listed four criteria:
- “What’s the quality of the asset”
- “What do we think we can acquire the deal for”
- “What value would it create for shareholders”
- “How do we finance the deal from a debt and equity point of view because THAT’S an important aspect from a value creation perspective.
Recent share purchases by management
The Executive management have arguably been insiders for a long period of late, but on November 10 th , Non-Executive chairman Gavin Wilson purchased 150,000 shares at a price of 29.9 pence per share and on November 16 th , Non-Executive Director, Jeffrey MacDonald purchased 60,000 at a price of 30.6 pence per share.
Risks
The Brent Oil price has taken a breather down to a $70 to $75 range recently and a further drop could result in a read through to Afentra however the breakeven oil price of this field is $35 and at the current price, Afentra is a cash flow generation machine!
Additionally, the risk that the field could deplete sooner than expected seems to have abated and the recent ERCE reserves report indicates a reserve replacement of 150%.
Conclusion
As Afentra closes its Angolan asset deals the share price strengthens and forms new lows. The current Brent oil price of $75 has resulted in a share price drop from its recent high of 34 pence to the current 30 pence but due to these highly accretive deals, Afentra is churning off $50 million in post CAPEX free cash flow at these levels. Value creation for shareholders is at the centre of all of Paul McDade’s investment decisions as he and his team own 4.27% of the company. The recently lower oil price only serves to offer more opportunities to acquire assets with accretive terms. Here, McDade reiterates the goal of “tens of thousands of barrels per day” and with value creation as the fulcrum for each deal, shareholders continue to benefit McDade’s renowned deal making ability. The liquidity offered by the London market is far greater than the STGAF ticker so it's better to invest in London ticker AET.L (#AET for twitter discussions and update and @AfentraPLC for the Company’s twitter feed).
For further details see:
Afentra Acquired Assets Worth $255m, With Only $37m Cash: Here's How: