2023-04-03 04:55:04 ET
Summary
- Africa Oil is part of the Lundin Group of companies.
- Africa Oil has a cash flow source in Nigeria and speculative prospects elsewhere.
- Africa Oil is debt free.
- The net debt to Africa Oil from Prime is less than the cash balance of Africa Oil.
- Both Prime and Africa Oil appear to be preparing to "go shopping" for more cash flow deals.
The Lundin Group of companies is actually a way for the controlling estate (or the heirs of the founder) to diversify. There is not a company at the top that controls these companies rather the current generation is in charge of the whole group. Africa Oil (AOIFF) is a Canadian company that is part of the Lundin Group of companies that reports in United States currency. As the name states, this part of the Lundin Group of companies specializes in doing business in Africa.
The advantage of being part of the Lundin Group is the resources available to a small company like this one when an appropriate deal comes along. That is no small advantage when compared to many companies the same size doing business in Africa. Those resources enabled this company to obtain a cash flow source that puts it way ahead of similar stocks in this price range. Now management is using that cash flow source to build up reserves to go shopping for more cash flow deals.
This actually appears to be a major change from the previous business of finding typical upstream leases that had a lot of potential. On the other hand, the first deal is usually the most challenging to make viable. Now that deal has been accomplished. It is going to be much easier to grow cash flow in the future through more deals. In the meantime, there are now funds for all those speculative upstream possibilities that no longer require periodic cash raises. Even though this remains a risky proposition, there is steady progress towards a more diversified and less risky future.
The key accomplishments to date are the repayment of debt to acquire an interest in Prime. As management has noted in other parts of the presentation, the payback of the cost of acquisition happened fast. That is good news. But it should also signal the risk of operating in this part of the world to investors. Comparatively speaking, an investor is highly unlikely to see such a good deal in the Gulf of Mexico.
Since the deal that led to the acquisition of Prime was completed, management now has the cash back through dividends from Prime in less than three years. Any more dividends will be "icing on the cake".
This deal was likely available because Nigeria is risky place to do business. The offshore where the leases are located are likely less risky. So, a relatively fast payback is indicated. Similarly, building cash flow from multiple sources is probably a priority due to the dependence on cash flow from a Nigerian operation.
Prime holds an interest in offshore operations that are managed by Chevron ( CVX ) and TotalEnergies ( TTE ). Operators of this stature give a small company like Africa Oil quite a bit of credibility beyond many competitors of the same size. Having an operator of that stature helps to reduce some of the risk of operating in this area of Africa.
Prime itself has quite a bit of debt. But the entity also has a strong enough cash balance to make the net debt far less. If the combined companies can find an attractive deal, then it is worth keeping the debt at Prime to take advantage of such a deal. Otherwise, it is far better to repay the debt. So, one major risk going forward is management's ability to continue to find more deals that result in decent cash flow as is the case with Prime.
This is probably a riskier strategy that parallels what is currently seen in the United States. Crescent Energy ( CRGY ) was formed because the founding parties believed it is cheaper to buy production than to drill for it. Earthstone Energy ( ESTE ) would be another pursuing cheap production. Therefore, the strategy pursued by Africa Oil is not unusual though some might not choose cash flow from a Nigerian operation.
Investments
In the meantime, this deal elevated the company from the typical penny stock story of speculative futures and necessary periodic capital raises to fund those speculative hopes. But the company still has a portfolio of those speculative ideas. The difference is that now the company can participate in capital raises.
The investments shown above are with companies that have attractive future prospects but really no current income. Therefore, if one goes to each website, then an investor can see the periodic capital raises that keep these companies going. Management now has the ability to keep its interest proportional to the total shares outstanding by electing to participate in those periodic capital raises. Many small investors do not have the option or do not exercise that option.
Of these, Africa Energy (HPMCF) may be the closest to a source of cash flow. But even that is a couple of years away at least. Eco Atlantic (ECAOF) has an interest in Guyana where Exxon Mobil ( XOM ) is the operator. To me, that gives this speculative idea more credibility than is the case with some other leaseholders. The company is still a long-shot to becoming an operating entity anytime soon. But having Exxon Mobil explore on your leases is a rare accomplishment.
Eco-Atlantic did announce discoveries in the Guyana Suriname basin with another operator a while back. But the oil was heavy with a high sulfur content. The result of that evaluation of the wells is that the cost to produce the oil is too high at the current time. Exxon Mobil has been plugging and abandoning that type of discovery because it has plenty of light oil discoveries to develop at a far lower cost. This group so far does not have those kinds of discoveries. So Eco-Atlantic and its partners are looking for light oil while pursuing a way to develop the discoveries economically.
The Future
Africa Oil is relatively cheap for the cash flow being generated at the current time. However, operations are in a country considered relatively risky. The offshore nature combined with the stature of the operators does limit the risk somewhat. But the stock made continue to be cheap until adequate diversification is achieved.
This where the evaluation of management and the resources of the Lundin Group of companies is very important. Both of these give Africa Oil a considerable advantage over many companies of its size. Not many managements could have completed a deal involving the acquisition of Prime. But this company did.
Now the cash balances appear to imply that more deals lie ahead. Successful deals should gradually lower the risk of this issue over time. But that is also where the major risk of this issue lies.
In addition, the portfolio of other early-stage upstream companies appears to offer an attractive but speculative future. This stock is definitely not for the risk averse investor. However, the Lundin Group of companies has long had an attractive record. Therefore, any investor who can properly evaluate the risks going forward may want to consider this issue. This would be a speculative (probably) strong buy. It is definitely risky. But as part of the Lundin Group of companies, it has an above average future for this type of speculation.
For further details see:
Africa Oil: Getting Ready To Go Shopping