Africa Oil Company (OTCPK:AOIFF) is a $400 million firm and one our favourite small cap alternatives within the sector right this moment. We have talked about this firm a number of occasions beforehand. Nonetheless, the aim of this text is to spotlight the corporate’s continued execution, together with why it is nonetheless one in every of our favourite alternatives within the sector.
Africa Oil Company Nigeria Deepwater
Africa Oil Company just lately made a significant acquisition of deepwater property in Nigeria. The corporate made a significant acquisition of 50% of an organization often known as POGBV (beforehand Petrobras Oil & Gasoline BV). The web value of the acquisition was $519.5 million, which the corporate paid for with money readily available and a $250 million mortgage.
That does not depend the corporate’s debt by means of POGBV, which was $912.5 million to begin with. Meaning the acquisition is price, from the attitude of buyers, principally, the corporate’s whole market capitalization. As we’ll see all through this text, that acquisition was good.
Africa Oil Company is getting stakes in three of the biggest producing offshore deepwater fields right here, particularly with latest manufacturing will increase. The fields collectively common roughly 440 thousand barrels/day of manufacturing with Africa Oil Company’s entitlement manufacturing at roughly 34 thousand barrels/day, a big quantity for a half billion firm.
For reference, Exxon Mobil (NYSE:XOM) trades at roughly 4x the worth per barrel of manufacturing.
The property are extremely high-quality and low-cost property too, with common 2019 working prices at $6.6/barrel.
POGBV Monetary Image – Africa Oil Company Investor Presentation
In truth, in case you take a look at the working and monetary image of POGBV in a traditional oil setting (2019), it is clear how sturdy the asset is. In 2019, it produced greater than $800 million of FCF, or 1.6x the acquisition worth. That is sufficient to repay the reserve based mostly debt + your entire buy worth paid in 2 years at a traditional oil worth.
Higher proof of this monetary power is thru the dividend funds POGBV often pays out to AOIFF as a shareholder. Within the 5 months since possession, AOIFF has received three dividend payments amounting to $112.5 million. That is sufficient to repay nearly half of the debt related to the acquisition that the corporate made. And that is simply within the first 5 months.
Africa Oil Company Progress Alternative – Africa Oil Company Investor Presentation
The subsequent alternatives to concentrate to right here for the corporate are development alternatives and the money stream power. The corporate has seen its WI manufacturing improve considerably from the Egina manufacturing ramp-up. The asset has now hit harvest mode with a 200 thousand barrel/day plateau and minimal capital necessities. Manufacturing may decelerate quickly, however the capital necessities might be minimal.
The corporate’s OML 130 alternative is among the quite a few potential development and supply alternatives close by. One other Egina-sized discovery may end in a big new development alternative. Price including right here is that development, mixed with continued $250 million in annual money stream by means of dividends, makes this acquisition spectacular – it will present vital long-term returns.
Africa Oil Company Kenya
Africa Oil Company’s different main property are in Kenya, which it has been engaged on for a very long time to develop. The corporate has introduced that it has declared a pressure majeure on manufacturing from its Kenyan property (a number of thousand barrels/day) because of the adverse impacts of the COVID-19 virus.
Africa Oil Company Kenya – Africa Oil Company Investor Presentation
The corporate’s Kenyan property have the potential to generate 10s of hundreds of barrels/day of manufacturing attributable to the corporate. The event pipeline has persistently been pushed again, and COVID-19 may have an extra influence, particularly with a possible one-year-plus delay which can harm potential help on capital expenditures from majors.
Nonetheless, on condition that the market has assigned these property a worth of close to zero, something that may occur from right here on out is upside.
Africa Oil Company Subsidiaries
Exterior of all of this, Africa Oil Company has various subsidiaries when it comes to its property which have vital potential.
Africa Oil Company Subsidiaries – Africa Oil Company Investor Presentation
Africa Oil Company owns various excessive potential oil property all through the world by means of its acquisition of main improvement property. The corporate has purchased stakes in blocks all through the world from firms comparable to Africa Power, Eco Atlantic (OTC:ECAOF), and Influence Oil. Similar to POGBV, by shopping for stakes and being a maintain firm, Africa Oil Company isolates itself from the monetary threat of any of those subsidiary firms.
To begin, in South Africa, the corporate has a close to 2% stake, a small comparatively risk-less stake. The potential asset measurement is 350 million barrels at $60/barrel, with the potential for 100ok barrels/day in peak manufacturing. Additionally, off of South Africa, the corporate has a 20% stake in blocks close to Namibia. Preliminary exploration is beginning right here.
The corporate additionally has stakes off of Guyana and Suriname, an space that has shortly turn out to be one of many largest exploration areas within the nation. It is essential to spotlight right here that the corporate’s fairness stakes of their subsidiary firms are nonetheless constructive, regardless of the volatility brought on by COVID-19.
Africa Oil Company Monetary Place
Africa Oil Company’s monetary place right here is evident.
Africa Oil Company Chosen Quarterly Data – Africa Oil Company Investor Presentation
Africa Oil Company has really turned its asset base into having sturdy constructive money stream. The corporate has seen sturdy adverse working expenditures because of writedowns of its exploration in Kenya. For instance, in 1Q 2020, the corporate took a $215.6 million writedown, which means its precise expenditures have been nearer to -$3.four million (like in earlier quarters).
Consequently, placing this all collectively, the corporate’s quarterly earnings is extra like $84 million. That is roughly $0.2/share on a quarterly foundation ($0.Eight annualized) versus the corporate’s present worth per share of $0.8/share. That offers the corporate a P/E ratio, not counting one-time writedowns, of roughly 1, highlighting the corporate’s money stream technology.
The corporate will pay down all of its debt inside a 1-year timeframe and generate vital potential returns for shareholders after that. This does not depend another potential success from the corporate’s huge portfolio of exploration property and subsidiaries.
Africa Oil Company Danger
Africa Oil Company’s threat is clearly by means of oil costs, which, like another oil firm, harm its potential income.
Nonetheless, oil costs have already rebounded strongly from their COVID-19 associated lows. Moreover, the corporate’s producing asset, POGBV has a value at roughly $6/barrel, which is extremely manageable. Meaning the corporate’s working netback is extremely excessive off of its property. Lastly, the corporate’s ratio of money stream to debt + market cap is extremely low ($1.65 billion counting the RBL vs. $300 million in annual money stream).
That low ratio means, even when costs drop additional, the corporate will be capable to generate sturdy shareholder returns.
Africa Oil Company is in a novel place the place not solely does the corporate have an thrilling portfolio of distributed low-risk property, the corporate is valuing these property at close to zero. Moreover, the corporate’s core producing asset, POGBV, was acquired at an amazing worth and continues to generate spectacular money stream for buyers.
Going ahead, the corporate will be capable to proceed paying its debt at a manageable stage, with vital development potential and constructive manufacturing from exploration outcomes. As oil continues its rebound, all of these items imply the potential for sturdy shareholder returns.
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Disclosure: I’m/we’re lengthy AOIFF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.