Of Value: From Seeking Alpha.
Africa Oil Corp.: The Venus Discovery Is Among The Sizable Catalysts
.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 Africa Oil Corp. Venus discovery is impressive to be a part of as a small E&P, being the largest 2022 discovery.
The company currently has a strong portfolio of low margin production, and it has numerous avenues to increase that production.
We'd like to see Africa Oil Corp. keep focusing on its plan going forward. It needs to rush to develop assets before global demand for crude oil declines.
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Africa Oil Corp. (OTCPK:AOIFF) recently took advantage of Impact Oil and Gas' upsized new equity offering, investing in just under 40 million shares for $31.4 million, increasing its ownership stake to 31.1%. The discovery is the largest sub-Saharan oil offering ever, and the largest discovery in 2022, with an estimated 3 billion barrels.
As we'll see throughout this article, the Venus discovery is among several sizable catalysts in Africa Oil Corp.'s portfolio.
The company had strong first quarter results, although the impact of lower oil prices is clearly visible.
Africa Oil Corporation Investor Presentation.
The company's cash position is $158.2 million, representing ~17.5% of the company's $910 million market capitalization. That's up $18 million QoQ, although it is down YoY. Still, it's a strong improvement from the company's $0 cash position post its POGBV acquisition.
The company's WI production from Prime Oil and Gas is just under 21 thousand barrels / day, down ~20% YoY, as the asset continues to mature. Still, the strength of Prime Oil and Gas is visible as the net debt position drops to an incredibly low $161 million net to the company's shareholders. We expect cash flow from operations to remain strong.
Africa Oil Corp. Southern Africa
Among the company's most exciting positions is its positioning in the Orange Basin.
Africa Oil Corporation Investor Presentation
The Venus discovery, as discussed above, was the largest discovery of 2022. The multi-billion barrel discovery passed pre-drilling expectations, and the company is the only publicly listed E&P with exposure. A four-well drilling program has begun, which will include investigating a potential westerly extension for the block.
Current forecasts are for a rapid FPSO development to lead to first oil in 2028 at roughly 250 thousand barrels / day, meaning just under 20 thousand barrels / day attributable to Africa Oil Corp. These recent FPSO developments have had strong margins. Additionally, the company has the Orange Basin Deep and Black 3B/4B assets.
Block 3B/4B has un-risked resources assessed at roughly 4 billion barrels, with a roughly 25% chance of success. The assets are being investigated for possible drilling with farm out operations. We expect cash flow and success from the Venus discoveries, could lead to substantial and rapid development in the company's other assets.
Overall, the company has exciting operations here.
Africa Oil Corp. Other Catalysts
The company has a number of other catalysts.
The company has built up a diversified portfolio across the world, partially through different equity holdings that it's built up. We'd like to see the company's production continue increasing from current levels, with high margin offshore production generating the cash flow for the company to provide strong shareholder returns.
It's a bit of a long-term wait, but the largest catalyst for us is whether the company can grow production going into the end of the decade.
Africa Oil Corp. Shareholder Returns
Africa Oil Corp. has the cash and cash flow to provide substantial shareholder returns.
The company's annualized dividend is $0.05 / share, or roughly 2.5%. That's a strong dividend that it can comfortably afford, and it plans to continue those buybacks. The company repurchased 3.1 million shares during the quarter for $6.7 million, slightly above current prices, and ~0.7% of its outstanding shares during the quarter.
That puts the company's annualized shareholder returns at ~5.5% based on the quarter's results. We've seen a tendency for the company to cut buyback rates during a downturn, and we'd like to see it reverse that trend and aggressively repurchase shares during the downturn to the tune of at least ~$15 million / quarter.
Thesis Risk
The largest risk to our thesis is crude oil prices, which have had a difficult time over the last several months, with fears of a recession. Brent Crude has dropped below $75 / barrel. While Africa Oil Corp. is highly profitable, that profitability drops substantially as oil prices drop, hurting the company's ability to drive future returns.
Conclusion
Given its valuation of less than $1 billion, Africa Oil Corp. has one of the most exciting portfolios in the industry. The company has strong core production from its Prime Oil and Gas acquisition, which has already exceeded its acquisition price. As net debt for Prime Oil and Gas goes down, the company will be able to drive more cash to Africa Oil Corp.
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 (OTCPK: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 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.
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.
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.
AND... A Syndicate of 3-5 Banks with a funding capacity of +- $300,000,000.
