2023-06-27 16:59:28 ET
Summary
- Africa Oil Corp.'s long-term CEO is stepping down as the company has finally positioned itself for long-term success.
- The company is backing out of Kenya, a prudent decision given a lack of success and the cost of ramping there.
- The company's Venus stake in Impact Oil remains a major catalyst going into the end of the decade.
- OML 130's license extension enables additional Prime Oil and Gas dividends, which should support shareholder returns.
Africa Oil Corp. ( AOIFF ) has had numerous things change recently. The company trades at a $1 billion USD valuation, despite all the changes recently. Specifically, its CEO is stepping down in several months. Additionally, after numerous years of turmoil, the company has withdrawn from Kenya, giving up its entire stake.
However, there have been other, much more exciting, developments, and as we'll see throughout this article, the company is a valuable investment.
Prime Oil and Gas
The company has had a number of major developments for Prime Oil and Gas. Among these is the company's announcement of a 20-year renewal of the company's OML 130 license. The company has an 8% shareholding here through its Prime Oil and Gas holding, and the new Petroleum Industry Act should help the company substantially.
From all of this together, the company has closed its Prime Oil and Gas refinancing. That has enabled Prime Oil and Gas to have the cash to pay out its first dividend of $62.5 million attributable to Africa Oil Corp. for the year, although we expect more dividends to come for the company. The new debt facility can be worth more than $1 billion within a 6-year timeframe.
That helps to indicate the strength of the asset.
The company's capital spending has increased as a result of OML 130 requirements. The company has completed its first infill wells and plans up to 9 more wells across Egina and Akpo. We expect the company to continue its aggressive growth here, with entitlement production for the company at more than 20 thousand barrels / day.
That production will enable increased returns.
Africa Oil Corp. Financial Positioning
The company's financial position remains strong, and it can utilize that to continue driving shareholder returns.
The company has continued to pay its annualized dividend of $0.05 / share. That's a dividend of more than 2%, one that the company can comfortably afford, and it costs the company <$25 million / year. The company's strong financial position has net debt of just $3.5 million, as the parent company has a substantial net cash position.
The company is clearly saving up cash, although we'd like to see more aggressive share buybacks. The company paid $31.4 million to maintain its post dilution stake in Impact Oil, using up some cash, but it's a number that the company can comfortably afford. We'd like to see continued investments in its business.
Africa Oil Corp.'s Catalysts
With strong financials, the company has a number of major catalysts.
TotalEnergies SE (TTE) is a major oil company with a market cap in the $10s of billions, and it's investing 50% of its 2023 exploration budget off the coast of Namibia . There's a new drillship arriving, and the company now has two drillships exploring this potentially incredibly valuable area. The Venus-1A is currently undergoing appraisal.
$300 million is being spent on appraising this discovery, which could hold billions of barrels of oil. The company has a stake of just over 6% here, and a first FPSO could conceivably be producing oil by the end of the decade in our view. 250k barrels / day from that FPSO could add 15k barrels / day in new attributable production for the company.
Combined with other blocks the company has in the region, the success of Venus could be an enormous success for the company.
Thesis Risk
The largest risk to our thesis is crude oil prices. The company is profitable even at current Brent prices of more than $70 / barrel. However, below that level its ability to drive returns becomes harder. That will result in the company generating returns that are insufficient to justify its valuation, making it a poor investment.
Conclusion
Africa Oil Corp. has had an incredibly busy month. First, its CEO announced that it was stepping down. That was after a number of tumultuous years, perhaps most signified by the company's final exit from its ambitions in Kenya. The cost to get the transportation off of the ground was just too much for the company.
The company has announced a 20-year extension for OML 130, enabling it to refinance the RBL. That has enabled a new dividend, and we expect additional dividends to continue. Each attributable dividend is 6% of Africa Oil Corp.'s market cap, and we expect several a year that translates to shareholder returns.
That, combined with the potential of Venus, makes the company a valuable investment.
For further details see:
Africa Oil Corp. - A Lot Is Changing