Another look at Laurentian Research re: AOC:
Guys please note:
With ~US$330 million of free cash flow guided for 2021, AOC could pay off the debt and become debt-free by year-end 2021 barring any acquisitions.
Investor takeaways: If the management uses the FCF to pay off debt first and then buy back shares, ceteris paribus, AOC can be taken private by the end of 2022.
These days, most oil companies are valued only based on their PDP reserves. The market is giving little credit to undeveloped reserves, let alone contingent resources and exploration upside. Therefore, it is understandable that AOC's equity interest in the three portfolio companies (worth >US$117 million) and working interest in the South Lokichar project in Kenya are not being considered by the market in the assessment of its intrinsic value.
However you cut it, the forward FCF yield of 66% and EV/EBITDA of 1.1X, both calculated solely based on the deepwater Nigerian producing assets, suggest that Africa Oil is deeply undervalued. Forthcoming quarterly earnings reports, if as bullish as discussed above, may drive serious re-rating. Additional catalysts can be found in two exploration wells off southwestern Africa and, further down the road, in the Kenyan project.
There are uncertainties associated with deepwater exploration at the portfolio companies and with the negotiations concerning South Lokichar. However, those risk factors appear to have been priced in.
If the management uses the FCF to pay off debt first and then buy back shares, ceteris paribus, AOC can be taken private by the end of 2022.
The management did say it would focus on debt reduction for the rest of 2021. Going into 2022, once debt-free, the management may well launch a share repurchase program, which will likely catalyze a swift reversion of the share price toward the intrinsic value. If that happens, Africa Oil can easily be a 5-10 bagger for investors who have the foresight to make an entry now.
