2023-09-18 06:24:39 ET
Summary
- Africa Oil Corp. has cleaned up its positioning and has the potential to generate substantial shareholder returns.
- The company had strong financial results for the quarter, with a strong cash position and net income of $106.9 million.
- AOIFF has made exciting oil discoveries that could contribute to long-term shareholder returns, particularly with the Venus discovery.
Africa Oil Corporation (AOI:CA), (AOIFF) is a small-to-mid-cap oil company that we've discussed numerous times. The company has had a tumultuous journey. However, the company has cleaned up its positioning substantially, and as we'll see throughout this article, it has the ability to generate substantial shareholder returns.
History
Africa Oil Corporation has an interesting history.
The company started trying to make oil production in Kenya come alive. It hit the point with its partners that it was producing and trucking oil. Unfortunately, it was unable to build sufficient takeaway infrastructure, with a proposed pipeline costing more than $1 billion. An inability to solve that meant that the company recently backed away from the project.
However, a unique opportunity stumbled on the company's plate. It managed, during uncertainty about oil portfolios during COVID-19, to buy a 50% shareholding in Prime Oil and Gas. That was an incredibly profitable acquisition, especially with Russia's invasion of Ukraine, that showed the company's financial skills.
Now we are at an inflection. The company has some new assets that it's working on developing, but whether that pans out as Prime Oil and Gas tones down, remains to be seen.
Financial Results
The company had strong financial results for the quarter.
The company maintains a strong cash position and earned $106.9 million in net income. That came as it got additional payouts from Prime Oil and Gas which represents its only source of income. At the same time, Prime Oil and Gas' net debt remains incredibly manageable and backed by reserves. The company has worked to clean up that balance sheet enabling dividends.
It's worth noting that the company made this acquisition just a few years ago, and it's already paid back the entire acquisition price. That's an indication of the strength of the deal.
Guidance
The company's guidance indicates a potential risk.
The company's production has concurrently dropped, a legacy of the fact that the company purchased legacy assets. Production is line with management guidance, but it is down noticeably YoY. FCF does remain strong at an estimated $200+ million for the year, supported by higher crude oil prices recently.
The company is in a much better but similar position to where it was with its Kenyan assets several years ago. Its existing assets are getting weaker and the company needs to find an alternative source of production. It has some exciting discoveries, but they'll take years to commercialize. In the meantime cash flow and driving shareholder returns will become tougher.
Oil Discoveries
The company has made some exciting oil discoveries that could help its long-term shareholder returns.
The massive discovery could be a "company maker" at a minimum of 3 billion barrels . Additional drilling is being done to define the limits of the asset. The strength of the asset is such that there are now two companies drilling there. The company participated in Impact's capital raise, and has a 6% stake in the blocks that could soon be producing hundreds of thousands of barrels / day.
That stake, in our view, means the potential of thousands of barrels / day of production, if not tens of thousands, for Africa Oil Corporation. The project will likely start with a single FPSO and grow from there.
Shareholder Return Potential
Putting this all together, Africa Oil Corporation has the ability to drive substantial shareholder returns.
The company has a $1.1 billion USD market capitalization. Prime Oil and Gas' debt is non-recourse to the company. The company pays out an annualized dividend at roughly 2%. The company has continued to receive dividends from Prime Oil and Gas, an acquisition that's been paid off, at a double digit yield for the company.
We expect the company to opportunistically repurchase shares and maintain its overall asset strength. The company halted share repurchases after prices dropped in 2022, but it maintains the financial strength to repurchase shares. We'd like to see it ramp up its share repurchases .
Thesis Risk
The largest risk to our thesis is crude oil prices. The company has been heavily supported by OPEC+ and its commitment to keep production lower, boosting prices. However, that could change, and so could the long-term potential of the industry. Replacement ratios helps, but we expect the industry to be dramatically different in a few decades, hurting its long-term potential.
Conclusion
Africa Oil Corporation is at another crossroads, its first major crossroads since the Prime Oil and Gas acquisition. That acquisition represented the company's best decision in its history and made up for some poor decisions made with the company's assets in Kenya and its plan to produce there, a plan that it finally gave up on.
The company has managed to pay off that entire acquisition and now it needs to shift towards shareholder returns. It also needs to plan for the future as the asset declines. The Venus discovery has incredibly high potential and drilling is continuing there. It needs to see a path to starting production, but once it does, we can see the asset being incredibly valuable, making the company a strong investment.
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For further details see:
Africa Oil Corp.'s Promising Future