Scotia upgrades AOI target price https://scotia.bluematrix.com/sellside/EmailDocViewer?encrypt=5896d5b5-e8f8-489c-9c9b-304ac5ee1d76&mime=html&co=scotia&id=replaceme@bluematrix.com&source=mail
Upgrading AOI on Venus Appraisal Upside
OUR TAKE: Positive. The Venus appraisal program has started and if it’s successful we expect AOI's indirect interest in Venus to be sold before development spending starts. After adjusting for the Venus exploration upside already reflected in AOI's share price, we estimate that successful appraisal results could add C$0.60-$1.50/sh of value. This represents 20-50% upside to AOI's current share price. Due to this significant exploration upside we are upgrading AOI to Sector Outperform and increasing the target price to $3.50/sh. In our view there is a >50% probability of successful appraisal results, but we are maintaining a speculative risk rating because unfavourable results will meaningfully impact AOI’s share price (~15% downside risk).
KEY POINTS
Overview of AOI’s Namibian exploration assets. In 2022 AOI announced that the Venus-1 exploration well, on Block 2913B, made a significant discovery offshore of Namibia. Appraisal drilling has started and results from the first well could be announced in mid-2023. The drilling program will also target the Nara prospect on blocks 2912 and 2913B. AOI has a 6.2% and 5.8% indirect interest in Blocks 2913B and 2912, respectively, through its investment in Impact Oil & Gas (Impact).
The appraisal program looks promising. TTE, the operator of blocks 2912/2913B, has allocated 50% of its 2023 exploration budget to Namibia and, if the appraisal program is successful, the company is prepared for fast-tracked development. Further, TTE’s CEO stated that “we are maybe at the helm of a new golden block”, but indicated it was too early to comment on Venus’ reserves. In the adjacent block SHEL drilled the successful Graff-1 exploration well and the company has drilled two follow-up wells, La Rona-1 and Jonker-1. NAMCOR, SHEL’s partner, recently announced that the Jonker-1 well made a light oil discovery. Given these positive data points, we are of the view there is a >50% probability of the Venus appraisal program proving that the discovery is commercially viable.
What would successful appraisal results mean for AOI? Management has indicated that Impact, or Blocks 2912/2913B, would likely be sold before significant development capex is required. After taxes, we estimate that AOI’s indirect interest in Venus could be worth $350-$650M (C$1.00-$1.90/sh), assuming total recoverable reserves of 3-4 billion boe. We estimate that ~C$0.40/sh of this upside is already reflected in AOI’s share price, which suggests positive appraisal results could add C$0.60-$1.50/sh of value (+20-50% upside vs AOI’s current share price). Further, successful drilling results from the Nara exploration and appraisal wells could add additional upside.