RE:RE:RE:RE:RE:good news https://seekingalpha.com/article/4733592-africa-oil-stock-strong-buy-positive-news-derisked-dividend-yield
Africa Oil: A Strong Buy With Positive News Flows And De-Risked 11.6% Dividend Yield
Nov. 06, 2024 4:41 AM ETAfrica Oil Corp. (AOI:CA) Stock, AOIFF StockCVX, GLPEF, GLPEY, TTE, TTFNF
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Summary
The completion of the farm-down of Impact's interest in Namibian blocks 2912/2913B cleared the path for Africa Oil to complete its consolidation of Prime Oil & Gas in Nigeria.
Owning 100% of Prime will double production, enabling 11.63%-yielding dividends. Nigerian regulatory approval of the Prime consolidation and the 20-year PML-52 extension de-risk these dividends for the foreseeable future.
Here, I argue AOIFF's recent pullback has made the stock deeply undervalued. Near-term catalysts and tripling of base dividends may drive the share price significantly higher.
Dividends to be tripled
Those following E&P activities in the Orange Basin off southwestern Africa know that I previously recommended Africa Oil Corp. (OTCPK:AOIFF) as the preferred way to gain exposure to this emerging oil province. Judging by the progress of E&P activities since then, the investment thesis has proven correct, though it may take a bit longer for shareholders to reap the rewards.
To that end, Africa Oil said last week that its investee company Impact Oil & Gas Limited has completed the farm-down of its interests in Blocks 2912 and 2913B offshore Namibia to TotalEnergies (TTE), with US$99 million in cash payments received as reimbursement for the net costs incurred on the blocks prior to January 1, 2024. Impact has retained a 9.5% interest in each of the blocks, which in accordance with industry farm-down customs are carried until the first sales proceeds from the Venus field, as shown in Figure 1.
Maps showing Blocks 2912/2913B in the Orange Basin in deepwater Namibia and leases of Prime Oil & Gas in deepwater Nigeria, including PML 52
The completion of the farm-down is expected to trigger a chain reaction of events:
It "satisfies a condition precedent to the amalgamation to effect the consolidation of all of Prime Oil & Gas Coperatief U.A. in Africa Oil," which holds interests in two oil complexes in deepwater Nigeria that collectively produce approximately 36,000 boe/d.
The completion of the Prime consolidation will officially double the reserves and production of Africa Oil, leading to a 2X increase in corporate FCF.
The doubling of corporate FCF will enable Africa Oil to significantly expand its shareholder return program. Indeed, the company is committed to paying out US$100 million (or US$0.15 per share) in base dividends after the Prime amalgamation, a 3X increase over the current dividends (US$23 million or US$0.05 per share) that existing shareholders have been receiving, and distributing 50% of the excess FCF in the form of supplementary dividends and/or share buybacks.
At US$0.15 per share, the base dividends will have a forward yield of 11.63%. Africa Oil now expects to close the Prime amalgamation by the end of the first quarter of 2025, implying that the 11.63%-yielding base dividends may start to be paid out as soon as the second quarter of 2025, as illustrated in Figure 2.
Dividends and Dividend Yields Relative to Share Structure, Pre- and Post-Prime Oil & Gas Amalgamation
Fig. 2. Dividends and dividend yields relative to share structure, pre- and post-Prime Oil & Gas amalgamation (Laurentian Research, based on Africa Oil financial reports)
Dividend safety
Africa Oil also announced two additional uplifting news last week, concerning the Nigerian oilfields:
The Nigerian Upstream Petroleum Regulatory Commission has given timely regulatory clearance for the combination of two partners in Prime Oil & Gas Coperatief U.A., i.e., Africa Oil and BTG Pactual Holding S. r.l. NUPRC has confirmed that the amalgamation does not amount to a change of control in the beneficial ownership of Prime's local subsidiaries, and ministerial consent is not required for the transaction; therefore, the transaction may proceed as proposed. The NUPRC regulatory approval was originally expected in mid-2025 or later.
NUPRC has also renewed Petroleum Mining Lease 52 (PML 52), containing the Chevron (CVX)-operated Agbami field, for 20 years effective from November 24, 2024. This follows last year's renewal of the licenses for the TotalEnergies-operated Akpo, Egina, and Preowei fields. Production at Agbami averaged 98,000 bo/d in 2023 from 30 producers, 5 gas injectors, and 10 water injectors, or 7,840 bo/d net to the 8% working interest of Prime Oil & Gas Coperatief U.A.
The 20-year renewal of these leases secures the long-term production outlook from these high-quality assets. Infill drilling programs at Egina, Akpo, and Agbami and the development of the Preowei field will further derisk the cash flow outlook of Africa Oil. The Africa Oil board of directors considers the above-described base dividends to be sustainable in a range of through-cycle oil price scenarios, as shown in Figure 3.
Estimated Operating Cash Flow, Free Cash Flow, and Base Dividends (in US$100 million) for 2024-2033. Free cash flow is derived from operating cash flow, based on a 2-year forward curve and US$70 long-term oil prices (inflated at 2% per year), and nominal CapEx
Fig. 3. Estimated operating cash flow, free cash flow, and base dividends (in US$100 million) for 2024-2033. Free cash flow is derived from operating cash flow, based on a 2-year forward curve and US$70 long-term oil prices (inflated at 2% per year), and nominal CapEx (modified by Laurentian Research based on Africa Oil presentations and financial reports)
In summary, the 11.63%-yielding dividends are believed to be safe because:
The Nigerian deepwater oilfields have been granted a 20-year lease extension, are of extremely low costs (US$15/boe in OpEx), and are being further developed by leading E&P operators (TotalEnergies and Chevron) for production stability;
With the farm-down in Blocks 2912/2913B and 3B/4B in the Orange Basin and Prime amalgamation in Nigeria, Africa Oil will become leaner and incur lower G&A;
Being carried until first oil production in Namibia, Africa Oil no longer has any significant capital commitment, enabling it to return FCF to shareholders.
Why the recent selloff then?
The stock of Africa Oil has been in a serious pullback since September 2023, as shown in Figure 4. First, it was sell the news of a successful drill-stem test in the discovery well Venus-1X and the drilling of the Venus-1A appraisal well. Next, Africa Oil CEO Roger Tucker negotiated the farm-down of the working interest of investee company Impact in blocks 2912/2913B as well as Africa Oil's stake in South Africa block 3B/4B, which many shareholders hated to see, perhaps due to loss aversion. Then, Africa Oil agreed with BTG Pactual Holding S. r.l. to merge their respective 50% stakes in Prime Oil & Gas Coperatief U.A., which some shareholders thought was done at an inopportune time when Africa Oil's share price had undergone a recent selloff. Amidst the uncertainty resulting from the series of transactions, the pause of share buybacks in the aftermath of the announcement of the Prime consolidation certainly did not help.
Dividend back-adjusted stock chart of Africa Oil (AOI.TO), highlighting the Venus giant oil field discovery, the spudding of Tambotti-1X well, and Bay Street analysts' 12-month price targets
Fig. 4. Dividend back-adjusted stock chart of Africa Oil (AOI.TO), highlighting the Venus giant oil field discovery, the spudding of Tambotti-1X well, and Bay Street analysts' 12-month price targets (Laurentian Research, based on Seeking Alpha)
Considering that Africa Oil trades at US$8.2 per barrel of low-cost, high-margin, producing 2P reserves, or 0.49X its NAV (pro forma the Prime consolidation and excluding exploration upside in blocks 2912, 2913B, 3B/4B, and Equatorial Guinea) as shown in Figure 5, I believe Africa Oil stock has been grossly oversold and is now deeply undervalued—especially as it currently trades at the same level as when news of the giant Venus discovery first broke (Figure 4).
NAV build-out of Africa Oil, shown with its market cap as of November 1, 2024. The NAV of the Nigerian producing assets is estimated from Africa Oil’s NI 51-101 statement of reserves for year-end 2023, with the gross asset value at 13% discount rate being US$1,065 million, adjusted for 50% of Prime’s net debt and Nigerian dividend withholding tax. The value of the Namibian assets is calculated from Africa Oil’s offer to Impact’s minority shareholders
Fig. 5. NAV build-out of Africa Oil, shown with its market cap as of November 1, 2024. The NAV of the Nigerian producing assets is estimated from Africa Oil’s NI 51-101 statement of reserves for year-end 2023, with the gross asset value at 13% discount rate being US$1,065 million, adjusted for 50% of Prime’s net debt and Nigerian dividend withholding tax. The value of the Namibian assets is calculated from Africa Oil’s offer to Impact’s minority shareholders (modified by Laurentian Research based on Africa Oil presentation and Seeking Alpha)
As Venus is being considered for accelerated development, it is prudent for Tucker to farm down Impact's (and Africa Oil's) exposure in blocks 2912/2913B to lower the financing risk. The forgone upside (10.5% farmed out), in my opinion, cannot compare with the benefit of eliminating all of the risks associated with having to come up with potentially billions of dollars of capital to develop Venus and conduct further exploration; it spares shareholders from severe equity dilution that would inevitably result from project participation. Farm-outs are a standard oil industry practice for project participants—especially small-cap companies like Africa Oil—to lower risks, and energy equity investors must learn to accept this. We cannot eat our cake and have it too. As for the temporary halt of share repurchases, it was a smart move on the part of Africa Oil management because continued share buybacks using Africa Oil's cash before the completion of the Prime consolidation mostly benefit BTG. I believe those investors who have sold will likely come around once the 11.63%-yielding dividends begin to be paid out. At least the high yield will cause much pain to the short sellers. That takes us to what near-term catalysts there are for Africa Oil.
Near-term catalysts
Besides the threefold increase of dividends likely starting in the 2Q2025, the following catalysts may drive the Africa Oil stock toward its intrinsic value.
Firstly, Africa Oil currently has an indirect interest of approximately 3.078% in Venus-containing blocks 2912/2913B through its 32.4% shareholding in Impact. Africa Oil is poised to increase its shareholding in Impact to approximately 39.5% via a call and put option agreement before February 27, 2025, which represents an effective economic interest of approximately 3.8% in the blocks.
Secondly, by drilling four wells (Venus-1X, Venus-1A, Venus-2A, and Mangetti-1X) in Block 2913B, the operator TotalEnergies has shown that Venus is a world-class field, possibly containing over 5 billion boe of in-place resources or 2 billion boe of recoverable light oil and associated gas. Venus is projected to come on stream by 2029 or 2030, initially producing 150,000-160,000 boe/d with one FPSO at a low cost of US$20/boe. Africa Oil is expected to be entitled to 5,890 boe/d of that initial production before carry repayment to TotalEnergies from Impact’s after-tax cash flow. The final investment decision (or FID) for Venus development is expected to be reached by the end of 2025. Although indications are that the Venus FID will be positive, investors should be aware of the risk that Venus development may be delayed.
Thirdly, further exploration in blocks 2912/2913B on the Namibia side and 3B/4B on the South Africa side of the Orange Basin may lead to additional discoveries, although exploration drilling always carries extremely high risks.
The Mangetti discovery may have an additional 1.5 billion boe of in-place oil. On October 20, 2024, TotalEnergies spudded exploration well Tamboti-1X in the far northern part of Block 2913B using the Odfjell DeepSea Mira semisubmersible rig, targeting approximately 2 billion boe of in-place resources in one objective similar to the reservoir penetrated in the nearby Mopane discovery of Galp Energia (OTCPK:GLPEY) and another objective already encountered in the Mangetti-1X well.
Two additional 3D seismic surveys were completed in 2024. The seismic data is currently being processed and interpreted, which is expected to lead to the identification of additional drilling targets in the far northern and southern parts of blocks 2912/2913B.
In South Africa's Block 3B/4B (Figure 6), where Africa Oil has a carried 18% interest and which has multiple exploration prospects on trend with the Venus and Graff discoveries, with an estimated 4 billion boe in unrisked gross P50 prospective resources, TotalEnergies is poised to drill one firm and one contingent well likely in Q1 to Q2 2025.
Map of the Orange Basin, showing blocks 2912/2913B on the Namibian side and block 3B/4B on the South African side
Fig. 6. Map of the Orange Basin, showing blocks 2912/2913B on the Namibian side and block 3B/4B on the South African side (Africa Oil)
Investor takeaways
Last week's completion of the farm-down of Impact’s interest in Namibian blocks 2912/2913B paved the way for Africa Oil to finalize its consolidation of Prime Oil & Gas Coperatief U.A. Owning 100% of Prime will double its production and facilitate the initiation of 11.63%-yielding dividends. The approval of the Prime consolidation and the 20-year extension of PML 52 by the Nigerian regulator substantially de-risk these dividends for the foreseeable future.
The recent pullback in Africa Oil’s share price has left the stock deeply undervalued relative to its NAV, creating an opportunity with approximately 100% upside. A series of near-term operational catalysts, combined with an expected tripling of base dividends likely starting in Q2 2025, is anticipated to drive the share price substantially higher despite the high risks associated with deepwater exploration drilling.
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