Africa Oil’s high-margin oil production base of ~20,000 bbl/day in Nigeria
continues to deliver stellar cash flow. We estimate a 2023 FCF yield of 14% at
Brent USD 75/bbl and expect buybacks to resume post the recent license
renewal/RBL refinancing. This also increases the potential for further
acquisitions, which the high cash balance in Prime indicating it may be sooner
rather than later, or extraordinary dividends. Still, exposure to the world’s
hottest new exploration play with ongoing drilling and production testing of
three wells is the main excitement in Africa Oil. The Venus follow up campaign
has an upside potential of >10 bn boe gross and may double Africa Oil’s share
price if successful. We believe the stock will move ahead of expected news in
Sept/Oct (news leaks may occur earlier) and therefore recommend buying
now. We resume coverage with BUY/TP SEK 35
Strong cash flow from proven long-lived production base of 20,000 bbl/day net
We estimate that Africa Oil’s portfolio of producing fields will deliver 20,500 bbl/day net
with an opex of USD 8/bbl, in line with current guidance. With realized prices slightly
above Brent and attractive fiscal terms, we estimate that Africa Oil will generate USD
100m/150m/200m of annual FCF at Brent 60/75/90 per bbl going forward. This is
equivalent to a FCF yield of 10%/15%/20% respectively. Further, we forecast resumed
infill drilling (Egina/Akpo) and the Preowei tieback development to offset most of the
natural decline to 2026-27e. Exposure to a large-scale asset (>370,000 boe/day gross
in 2022) with a long production history operated by supermajors (TotalEnergies
/Chevron) far from shore are also important risk mitigation factors, in our opinion. With
the license renewal and RBL refinancing in place, dividends from Prime have resumed
with further payouts likely in H2’23e. This will enable resumed buybacks as soon as
Africa Oil is out of the blackout period created by the ongoing drilling campaign
offshore Namibia.
Ongoing drilling and testing of multibillion barrel potential offshore Namibia
Africa Oil holds a 6.2% indirect WI in the Venus discovery offshore Namibia through its
stake in Impact Oil and Gas. Operator TotalEnergies has mooted it as a “Golden block”
and will this year spend more than 50% of its global exploration budget to apprise the
Venus discovery and drill the Nara prospect. The campaign is ongoing with two rigs set
to drill up to three wells and conduct four production tests. The total potential is
challenging to assess, but the Venus discovery is believed to be several billion barrels
(we think cons. is around 5 bn boe before “risking discounts”) with Nora holding a
similar sized potential. As such, the upside potential is massive, and the amount of
activity creates a string of news flow. However, the operator may prefer to conduct as
much work as possible before publishing results leading us to expect news in Sept/Oct
(TotalEnergies hosts its CMD on 27 Sept). That said, we question if the campaign at
the world’s hottest new exploration play can be conducted without any news leaks. The
potential triggers can thereby come earlier than expected. We also believe the stock is
likely to trade up on speculation prior to the results being released.