Summary
- Africa Oil Corp. has a diverse asset portfolio with operating assets in Nigeria and exploration/development exposure to other African countries as well as Guyana.
- The company is on solid footing, standing at a net cash position of US$207.3M and is returning value to shareholders through dividends and share repurchases.
- I estimate that only the Africa Oil Corp. operating assets are worth 50.9% more than the current market value of the entire company, without taking into account the considerable exploration upside.
When looking for natural resource equities to add to my portfolio, I'm always striving to find companies with operating assets and solid financial condition but also offering significant exploration potential on top of that. Ideally, those companies will be priced in a way that even the operating assets appear to be worth more than the enterprise value, which leaves all the exploration upside for free. Additionally, returning some value to shareholders through dividends and/or buybacks is always a positive. In this article, I'll present one company that I believe fits these criteria - Africa Oil Corp. ( AOIFF ). Standing on a solid net cash position of US$207.3M, the company is returning value to its shareholders. According to my estimates, just its operating assets in Nigeria offer a 50.9% upside to the current price, without taking into account the diverse pool of exploration/development assets.
Company overview
Africa Oil is a Canadian oil and gas company with a focus on Africa. It has producing assets in the offshore Deepwater fields of Nigeria as well as exposure to exploration prospects in Namibia, South Africa, Kenya, and in the Senegal Guinea Bissau Joint Development Zone either directly or through minority stakes in Africa Energy Corp. ( HPMCF ) (19.72% direct stake + 11.2% through Impact), Eco (Atlantic) Oil & Gas ( ECAOF ) (15.97%), and a 30.88% stake in the privately held Impact.
Strong cash flows from producing assets
In January 2020, Africa Oil made an acquisition of a 50% stake in Prime Oil & Gas Coöperatief U.A. ("Prime") from Petrobras ( PBR ) for a cash consideration of US$519.5M. Prime has an 8% equity interest in Block OML 127 and a 16% interest in Block OML 130, both in Deepwater Nigeria. Despite the transaction happening right before the pandemic hit the oil market, leading to record-low prices in 2020, due to prudent risk-management policy, Prime had 95% of its 2020 production hedged at US$66/barrel.
This allowed the company to generate strong cash flows even when the oil and gas sector as a whole was suffering. Granted, the hedging policy was somewhat of a drag in H1'21 and 2022, but a new hedging strategy was introduced , allowing the company to retain greater upside exposure. Under this strategy, the cargo is hedged only if the forward price dips below a certain trigger point, otherwise is sold at spot. As far as attributable production to Africa Oil, preliminary data indicates that it has been 25.6kBOE/day in 2022, in line with management's guidance.
Since the acquisition of the equity stake, Prime has been showering Africa Oil with dividends. From February 2020 to October 2022, US$650M of dividends were received by Africa Oil, significantly exceeding the amount that the company paid for to acquire the asset.
Solid financial position and shareholder returns
The dividend inflows from Prime have allowed Africa Oil to achieve a net cash position of US$207.3M as of Q3'22, compared to a net debt position of US$155.2M as of the end of Q1'20, when the Nigerian asset was acquired.
Due to its improved financial position and consistent dividend inflow from Prime, in 2022 Africa Oil initiated a shareholder returns program, consisting of dividends and share buybacks. Throughout the year, US$23.8M was distributed back to shareholders, while an additional US$39.5M was spent on repurchasing and subsequently cancelling 17.4M shares. The buyback continues in 2023 as well, with additional 2.7M shares being repurchased up to 10 February.
Exploration/Development opportunities
Through its minority equity stakes in Africa Energy, Impact, and Eco (Atlantic), Africa Oil has exposure to two of the most promising undeveloped oil areas of the world - offshore Guyana and Namibia. Guyana is projected to be amongst the most significant offshore production countries in the world in the coming decade. Africa Oil has exposure to two Blocks there through Eco, which are in exploration stage. The offshore exploration exposure to Namibia and South Africa is a lot higher as Africa Oil has indirect stakes in much more Blocks there. Recently, TotalEnergies ( TTE ) and Shell ( SHEL ) made a huge discovery in the region. One of the Blocks, where a significant resource discovery was made is the 2913B , where Africa Oil has around 6.2% stake through its ownership in Impact.
Kenya
The most advanced asset of Africa Oil, that is yet to be in production, is the development project in Kenya. It has a defined resource base and a Field Development Plan. The problem with this project is the high initial capital requirement. The plan envisions US$2B of expenses for upstream work, with an additional US$1.4B for pipeline construction.
On the other hand, the economics of the project are attractive, with an estimated NPV on the contingent resource base of Africa Oil's 25% stake of US$577M. However, the oil price assumptions for the calculation were quite low, with a long-term Brent price of around US$60/barrel. If current prices are used, the value of the project should be in the billions of dollars. In the Q3'22 earnings call , Keith Hill - the CEO of Africa Oil - announced that they are in talks with two interested parties for a potential farm-out or partnership regarding the Kenya assets.
Valuation
I'll approach the valuation of Africa Oil Corp. in a very conservative way, without assigning any value to the exploration/development assets. While they likely hold some value, especially the more advanced one in Kenya, if the company ends up being undervalued even only based on its producing assets in Nigeria, then it could be a great bargain to get all the exploration/development potential upside for free.
In order to calculate the EV of Africa oil, while taking into account only the Nigerian assets, I started from the reserves estimates as of 2021 year-end as baseline. The 2P reserves of net entitlement as of then were 82.1M barrels, while the after-tax estimated NPV discounted at 10% was US$1,444M. However, since the net debt position of Africa Oil (and Prime) has changed dramatically over this period and oil prices have been considerably higher than the ones assumed in the calculation, I decided to make some adjustments and bring the numbers to Q3'22, when the latest available quarterly report of the company is dated. So, I subtracted the 7.2Mboe extracted in the first nine months of 2022 and also adjusted the NPV by bringing it 9 months forward. Also, for the number of shares, I used the number of 462.8M as of 2022 year-end and subtracted the 2.7M repurchased in 2023 so far.
Unit | ||
2021 year-end 2P reserves | Mboe | 82.1 |
Production Jan-Sept'22 | Mboe | 7.2 |
Implied remaining | Mboe | 74.9 |
Implied reduction in 2P | % | 8.7% |
Estimated NPV @10% as of 2021 year-end | US | 1 444 |
PV factor as of end Q3'22 | 1.074 | |
Adjusted estimated NPV as of Q3'22 | US | 1 416 |
Net debt (including Prime) | US | -42.2 |
Implied equity value | US | 1 458 |
Number of shares | M | 460.1 |
Fair Value | US$ | 3.17 |
Current price | US$ | 2.1 |
Implied upside | % | 50.9% |
The end result indicates a fair price for Africa Oil Corp. of US$3.17, or 50.9% upside of only the Nigerian assets. This indicates that all of the exploration/development potential is for free, while the producing asset is undervalued.
As far as potential catalysts, I could think of a few. Firstly, an increase of the dividend in conjunction with the buyback should lift demand for shares, applying upside pressure on the price. Another potential catalyst is news regarding the exploration assets of the company. Significant discovery, potential partnership/farm out of the Kenyan assets could also be a catalyst.
Risks
Exploration risk
Africa Oil Corp. has exposure to a lot of assets that are yet to be producing, with most of them with still undefined resource bases. This is a source of significant geological risk, as the resources may end up not being economically viable. However, my calculations indicate that only the producing assets in Nigeria should be worth more than the entire company, so even if all of the exploration prospects fail, there is still upside potential for the shares.
Political risk
Nigeria is one of the most corrupt counties, according to the Corruption Perception Index of Transparency International, where the country is ranked on 150th place out of 180 countries. Oil theft is not uncommon, and even the government is allegedly involved. However, the fact that Africa Oil's assets are located offshore and could be loaded on the site without traveling through miles of pipeline in the forest makes theft less likely. When it comes to potential theft of the asset itself by the government, the risk is somewhat reduced by the presence of a large multi-national oil majors like Chevron ( CVX ) and TotalEnergies as operators of the respective Blocks. These companies have much more political influence than a small company like Africa Oil, so Nigerian officials will think twice before attempting to nationalize the assets, for example.
Conclusion
Africa Oil Corp. has everything I look for in an oil company. The operating assets in Nigeria are generating significant cash flows, and I estimate the company to have a 50.9% upside only on them. However, in addition, there's a diverse exploration asset portfolio, offering exposure to one of the most promising oil prospects - Guyana and Namibia. On top of that, Africa Oil Corp. is debt free, sitting on a cash pile of US$207.3M, and is returning value to its shareholders through dividends and share buybacks.
For further details see:
Africa Oil Has Everything I Look For In An Oil Play