Here is the article I promised.
Africa Oil Corporation Announces Quality Earnings
Aug. 16, 2021 5:15 AM ETAfrica Oil Corp.
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Summary
Africa Oil Corporation has a well distributed portfolio of assets uniquely positioned to consistently earn cash flow from high oil prices.
The company has a net debt position that can be paid off in 3-4 months at the corporate level, and Prime Oil & Gas' position is also improving.
Going forward, we expect the moment we've been consistently discussing, where Africa Oil Corporation earns enough to start driving significant shareholder rewards to come true.
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Golden pipes going to oil refinery
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Africa Oil Corporation (OTCMKTS: OTCPK:AOIFF) is a more than $600 million company that makes it one of the largest up and coming oil companies. The company has recently announced incredibly strong earnings and is moving well towards the path where it can redirect its massive cash flow towards shareholder returns. As we'll see throughout this article, the company is a valuable investment at current prices.
Africa Oil Corporation Highlights
Africa Oil Corporation has numerous highlights worth paying attention to for shareholders.
Africa Oil Corporation Highlights - Africa Oil Corporation Investor Presentation
Africa Oil Corporation earned $38.4 million in net income for the quarter, with an end of quarter cash balance of $35.1. The company's annualized net income is just over $150 million, incredibly strong for a $600 million company. The company has indicated a plan to move towards shareholder rewards with this incredibly strong cash flow.
The company received a dividend of $37.5 million from Prime during the quarter and a further $37.5 million in July. The company announced the closing of its corporate debt facility with $160 million committed balancing out its asset portfolio. The company has repaid its term loan and still has a respectable cash palace with net debt of just $56 million.
Africa Oil Corporation Financial Position
Overall, as Africa Oil Corporation continues to aggressively pay down its debt, the company is, in our view, positioned to drive strong shareholder returns.
Africa Oil Corporation Financial Position - Africa Oil Corporation Investor Presentation
Africa Oil Corporation as we discussed above, generated strong profits. The company has maintained a strong cash position and is continuing to get strong dividends from Prime Oil & Gas. Since the acquisition was completed for $520 million roughly 18 months ago, Africa Oil has received $275 million worth of dividends.
The company's net debt is incredibly low, the company has a net debt position of just $56 million. For perspective, that amounts to roughly 3-4 months of dividends from Prime Oil & Gas for the company to hit a net debt position of 0. We expect, going into next year this strong financial position will lead to the start of share buybacks or dividends at current prices.
Africa Oil Corporation Prime Oil & Gas Financials
Delving deeper into the company's most important producing asset is Prime Oil & Gas.
Prime Oil & Gas Financials - Africa Oil Investor Presentation
Africa Oil Corporation's most exciting asset (apologies for the giant text block) continues to be their 50% stake in Prime Oil & Gas. With OPEC+ restrictions lifting, even with the potential impact on oil and gas prices, Prime Oil & Gas is one of the company's that stands to benefit. It's economic entitlement production continues to be almost 31 thousand barrels/day.
The way Prime Oil & Gas works is through sales volumes and cargoes that the company receives each quarter. These are normally to the tune of several million barrels/day. The company has sold the remainder of its 2021 cargo at $58/barrel meaning it won't benefit as much, however, in 2022 it's only hedged 21% of production at $67/barrel giving more upside.
With current prices just over $70/barrel, and the cash flow essential to the company paying down debt, hedging for another year could help the company guarantee shareholder returns to some extent (i.e. 50-60% hedged).
Across the board capital expenditures and operating costs have remained incredibly low ($5.7 million for the first half and ~$6.2/barrel lifted). Another interesting development is discussions with Equinor over tract participation agreements by the companies. So far they've received a $305 million security deposit and depending on how things pan out here it could be a strong cash position.
The last thing we want to note is Prime Oil & Gas' strong financial position. The company has a $557 million net debt position relative to Africa Oil Corporation's interested and a $292.8 million cash position, meaning a $260 million net debt position. That's drastically reduced from the debt position at acquisition (although it does count the security deposit).
It does mean however, that much more of Prime Oil & Gas' income has the potential to pass through to Africa Oil Corporation dramatically increasing the company's shareholder return potential. The fact that, at $58/barrel hedges, Prime Oil's cash flow from operating activities is more than $600 million, or Africa Oil Corporation's market cap shows the potential here.
Africa Oil Corporation Operational Outlook
For the remainder of the year, we expect Africa Oil Corporation's operations to continue to perform incredibly well.
The company is working to solidify gas payments and add stability there. The company is looking to develop new wells in Kenya and still has access to its shareholding companies which have respectable assets. The company has a 30.9% stake in Impact Oil and Gas along with a 31.2% stake in Africa Energy. These stakes are worth $10s of millions.
This highlights the company's overall portfolio stake and diversification. The company has incredibly strong growth potential from Prime Oil & Gas. It'll continue generate massive cash flow with minimal amounts of remaining debt. The company, if it chooses to, could finish paying off the entirety of its debt before the end of 2022.
The company also has long-term potential from Kenya. It also has stakes in other companies that have the potential to generate multi-bagger rewards worth billions. All of this together, makes Africa Oil Corporation a valuable long-term investment.
Africa Oil Corporation Shareholder Returns
Africa Oil, through the distributed financial strength of its assets, has the ability to generate substantial FCF in the upcoming years.
On a normal year, the company receives roughly 5 dividends from Prime Oil & Gas worth $170 million. The company has just $56 million of net debt, or roughly 4 months of cash flow. After that, the company will have an almost 30% yield to generate shareholder returns through buybacks and dividends. That doesn't include the cash that the company is retaining.
That cash will enable the company to pay down debt, though once it's paid, it should result in additional cash passing through to Africa Oil Corporation. We expect Africa Oil Corporation to continue seeing its share price grow aggressively going forward.
Africa Oil Corporation Risk
Africa Oil Corporation's risk is much less execution based than other companies because the company already has a portfolio of valuable and growing oil producing assets. Rather, the company's largest risk is quite simple, it's oil prices. The company is incredibly profitable at current oil prices; however, the story would change if prices were to fall 50%.
While that's the same for all oil companies, and Africa Oil Corporation's financial position is stronger than normal, it's still a risk worth paying attention to for all industry investors.
Conclusion
Africa Oil Corporation has an impressive portfolio of assets with a unique ability to continue long-term growth and generate impressive shareholder returns. The company has spent the ~18 months since the acquisition covering the accrued debt. However, now that it's paid the majority of that down, it can move into shareholder return mode.
We expect Africa Oil Corporation to generate massive shareholder rewards over the subsequent years. Going into year-end 2021, we expect the company to generate massive shareholder returns. We project significant double-digit shareholder rewards, which makes Africa Oil Corporation a valuable long-term investment.
