Arctic Securities Bullish Reports on Africa Oil and Africa Energy

Fit Investment Ideas

Aug 15

Arctic on African Energy: "From waiting game to action time"

Africa Energy and Africa Oil have a lot of catalysts in 2H22. The consensus is very bullish. Today Arctic joined the bullish analysts crowd on both stocks. Summary below.

Africa Oil is our largest position in the sector, Africa Energy is the second largest.

Africa Energy Corp
Recommendation: Buy · Target Price: SEK 4.5 (3.5) ·
Current Share Price: SEK 2.82

From waiting game to action time

Since YE'20, Brent is up >90% and European gas price are up >10x, while AEC is down 15%. The reason is likely lack of operational activities and newsflow.
This is however likely to change over the next six months, with drilling of Gazania-1 in Block 2B and the finalization of a gas offtake agreement on Block 11B/12B.
We find the current entry point attractive and raise our TP as we have updated our commodity price assumptions.

Gazania-1 on track for spud in September – potential to justify 3 SEK/sh

The Island Innovator semi-submersible drilling rig is expected to start drilling the Gazania-1 well on Block 2B next month. Oil was discovered in the license by Soekor in 1988, which has de-risked the formation and the geological chance of success is now deemed to be >50%. Due to its location in shallow waters, the minimum commercial discovery size is, according to AEC, less than 50 mmbbl, whereas the best estimate of the prospect size lies above 300 mmbbl. We have currently valued the prospect to 0.8 SEK/sh, while in a success scenario, its full un-risked value potential could be >3 SEK/sh.

Block 11B/12B soon to move into a new phase
Negotiations around gas offtake terms for a development of Luiperd/ Brulpadda are likely to be concluded before the Production Right- application is handed in to the authorities, and the latter is subject to the nearing deadline of September 2022. In addition to paving the way for monetization of existing discoveries, this would open up for a new exploration phase in the license, which clearly would be in the interest of AEC.

Valuation and recommendation
Its puzzling how AEC has massively underperformed in a period when a wide, global energy crunch has developed. Block 11B/12B has a role to play to ease the crisis, through offering a long-term, stable gas supply to the African region that would replace coal and be highly profitable for all stakeholders involved. Our TP is set a P/NAV of 0.9x. However, as highlighted, the NAV could see significant upward revisions over the coming next months.

Africa Oil Corporation
Recommendation: Buy · Target Price: SEK 34.0 (33.0) ·
Current Share Price: SEK 20.3

A stock to have on the radar this fall

The highlight of AOI's Q2 report was the launch of a 10% buyback program that we believe should contribute to narrowing the discount to core NAV. AOI's net debt (incl. Prime) as of end-Q2 came in USD 20m better than our estimate. This, combined with the share price increase in Africa Energy, drives our TP increase to SEK 34 (33). The main trigger later this year continues to be appraisal of the Venus discovery.

Another quarter demonstrating strong cash flow

AOI (incl. Prime) turned net cash USD 21m as of end-Q2 (vs. ARCe USD 0m), driven by another cash flow beat from Prime. Production averaged 25,300 boe/d, which is stable QoQ and we have only fined-tuned our estimates.

Several high impact triggers could materialise over the next 6-12 months

The Venus appraisal drilling program is expected to commence later this year. Should a resource estimate of 10bn bbl recoverable eventually be confirmed, and one applies a conservative NPV/bbl of 3 USD/bbl, the discovery has potential to contribute ~38 SEK/sh net to AOI. In Nigeria, early license extensions would accelerate dividend streams from Prime to AOI and quickly trigger highly profitable investments such as the Preowei project. AOI also has ample M&A capacity and is, according to management, actively pursuing sizeable opportunities. As the company will not sacrifice shareholder returns (demonstrated through the initiation of the buyback program) and has a successful M&A track record, we believe a potential transaction is more likely to be accretive and well-received than the opposite. We still view Kenya as a risky but high reward option (not included in our TP), as it will be critical to secure a new partner in order to mature the project to FID.

Valuation and recommendation
Our TP is set at core NAV, amounting to 34 SEK/sh, whereas our full risked NAV stands at 42 SEK/sh. As the downside is well supported by Prime's producing assets, we find the risk/reward to be asymmetrically skewed to the upside.

Disclousure:

The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.