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Africa Oil Corporation: Invest Today, Based On Continued Portfolio Execution
Jul. 14, 2020 1:51 PM ET|
Summary
Africa Oil Corporation has an impressive portfolio of assets, and its POGBV assets have continued to outperform.
The company's exploration assets are given nearly zero value by the market, meaning the potential for strong outperformance.
We recommend investing at the current level with a small portion of your portfolio, especially taking advantage of downturns as they occur.
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Africa Oil Corporation (OTCPK:AOIFF) is a $400 million company and one our favorite small cap opportunities in the sector today. We've talked about this company several times previously. However, the purpose of this article is to highlight the company's continued execution, along with why it's still one of our favorite opportunities in the sector.
Africa Oil Corporation - Africa Oil Corporation
Africa Oil Corporation Nigeria Deepwater
Africa Oil Corporation recently made a major acquisition of deepwater assets in Nigeria. The company made a major acquisition of 50% of a company known as POGBV (previously Petrobras Oil & Gas BV). The net cost of the acquisition was $519.5 million, which the company paid for with cash on hand and a $250 million loan.
That doesn't count the company's debt through POGBV, which was $912.5 million to start with. That means the acquisition is worth, from the perspective of investors, basically, the company's entire market capitalization. As we'll see throughout this article, that acquisition was brilliant.
Nigeria Asset - Africa Oil Corporation Investor Presentation
Africa Oil Corporation is getting stakes in three of the largest producing offshore deepwater fields here, especially with recent production increases. The fields together average roughly 440 thousand barrels/day of production with Africa Oil Corporation's entitlement production at roughly 34 thousand barrels/day, a significant amount for a half billion company.
For reference, Exxon Mobil (NYSE:XOM) trades at roughly 4x the value per barrel of production.
The assets are incredibly high-quality and low-cost assets too, with average 2019 operating costs at $6.6/barrel.
POGBV Financial Picture - Africa Oil Corporation Investor Presentation
In fact, if you look at the operating and financial picture of POGBV in a normal oil environment (2019), it's clear how strong the asset is. In 2019, it produced more than $800 million of FCF, or 1.6x the purchase price. That's enough to pay off the reserve based debt + the entire purchase price paid in 2 years at a normal oil price.
Better evidence of this financial strength is through the dividend payments POGBV occasionally pays out to AOIFF as a shareholder. In the five months since ownership, AOIFF has received three dividend payments amounting to $112.5 million. That's enough to pay off almost half of the debt associated with the acquisition that the company made. And that's just in the first five months.
Africa Oil Corporation Growth Opportunity - Africa Oil Corporation Investor Presentation
The next opportunities to pay attention to here for the company are growth opportunities and the cash flow strength. The company has seen its WI production increase significantly from the Egina production ramp-up. The asset has now hit harvest mode with a 200 thousand barrel/day plateau and minimal capital requirements. Production might slow down soon, but the capital requirements will be minimal.
The company's OML 130 opportunity is one of the numerous potential growth and delivery opportunities nearby. Another Egina-sized discovery could result in a significant new growth opportunity. Worth adding here is that growth, combined with continued $250 million in annual cash flow through dividends, makes this acquisition impressive - it'll provide significant long-term returns.
Africa Oil Corporation Kenya
Africa Oil Corporation's other major assets are in Kenya, which it has been working on for a long time to develop. The company has announced that it has declared a force majeure on production from its Kenyan assets (several thousand barrels/day) as a result of the negative impacts of the COVID-19 virus.
Africa Oil Corporation Kenya - Africa Oil Corporation Investor Presentation
The company's Kenyan assets have the potential to generate 10s of thousands of barrels/day of production attributable to the company. The development pipeline has consistently been pushed back, and COVID-19 will have an additional impact, especially with a potential one-year-plus delay which will hurt potential support on capital expenditures from majors.
However, given that the market has assigned these assets a value of near zero, anything that can happen from here on out is upside.
Africa Oil Corporation Subsidiaries
Outside of all of this, Africa Oil Corporation has a number of subsidiaries in terms of its assets that have significant potential.
Africa Oil Corporation Subsidiaries - Africa Oil Corporation Investor Presentation
Africa Oil Corporation owns a number of high potential oil assets throughout the world through its acquisition of major development assets. The company has bought stakes in blocks throughout the world from companies such as Africa Energy, Eco Atlantic (OTC:ECAOF), and Impact Oil. Just like POGBV, by buying stakes and being a hold company, Africa Oil Corporation isolates itself from the financial risk of any of these subsidiary companies.
To start, in South Africa, the company has a near 2% stake, a small relatively risk-less stake. The potential asset size is 350 million barrels at $60/barrel, with the potential for 100k barrels/day in peak production. Also, off of South Africa, the company has a 20% stake in blocks near Namibia. Initial exploration is starting here.
The company also has stakes off of Guyana and Suriname, an area that has quickly become one of the largest exploration areas in the country. It's important to highlight here that the company's equity stakes in their subsidiary companies are still positive, despite the volatility caused by COVID-19.
Africa Oil Corporation Financial Position
Africa Oil Corporation's financial position here is clear.
Africa Oil Corporation Selected Quarterly Information - Africa Oil Corporation Investor Presentation
Africa Oil Corporation has actually turned its asset base into having strong positive cash flow. The company has seen strong negative operating expenditures as a result of writedowns of its exploration in Kenya. For example, in 1Q 2020, the company took a $215.6 million writedown, meaning its actual expenditures were closer to -$3.4 million (like in previous quarters).
As a result, putting this all together, the company's quarterly income is more like $84 million. That's roughly $0.2/share on a quarterly basis ($0.8 annualized) versus the company's current price per share of $0.8/share. That gives the company a P/E ratio, not counting one-time writedowns, of roughly 1, highlighting the company's cash flow generation.
The company can pay down all of its debt within a 1-year time frame and generate significant potential returns for shareholders after that. This doesn't count any other potential success from the company's massive portfolio of exploration assets and subsidiaries.
Africa Oil Corporation Risk
Africa Oil Corporation's risk is obviously through oil prices, which, like any other oil company, hurt its potential profits.
However, oil prices have already rebounded strongly from their COVID-19 related lows. Additionally, the company's producing asset, POGBV has a cost at roughly $6/barrel, which is incredibly manageable. That means the company's operating netback is incredibly high off of its assets. Lastly, the company's ratio of cash flow to debt + market cap is incredibly low ($1.65 billion counting the RBL vs. $300 million in annual cash flow).
That low ratio means, even if prices drop further, the company will be able to generate strong shareholder returns.
Conclusion
Africa Oil Corporation is in a unique position where not only does the company have an exciting portfolio of distributed low-risk assets, the company is valuing these assets at near zero. Additionally, the company's core producing asset, POGBV, was acquired at a great price and continues to generate impressive cash flow for investors.
Going forward, the company will be able to continue paying its debt at a manageable level, with significant growth potential and positive production from exploration results. As oil continues its rebound, all of these things mean the potential for strong shareholder returns.
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Disclosure: I am/we are long AOIFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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