Africa Oil Corporation (OTCMKTS: OTCPK:AOIFF) is a $574 million small cap oil company. I recommend reading my last article on it here. Since then, the terms of the company’s Nigeria Deal were announced. As we’ll see through this article, the terms of the company’s Nigeria deal will provide it with cash flow that combined with the company’s other investment opportunities and catalysts make it a strong long-term investment.
Africa Oil Corporation Nigeria Deepwater
Let’s start by discussing the most important thing that has happened to Africa Oil Corporation since my last update, the acquisition of Nigerian Deepwater assets.
Africa Oil Corporation has recently acquired a 50% interest in POGBV (Petrobras Oil & Gas B.V.). The acquisition was effective as of the 14th January 2020 with a headline price of $1.4 billion. However, due to POGBV drawing out dividends that were paid to the owners, Petrobras at the time, the final cash payment on the deal was $520 million. This was paid with cash on hand and a $250 million bridge loan facility.
It’s important to note that this acquisition was what we call a “company maker”. Similar to how Chevron called its Tengiz oil and gas field a “company maker” that defined the company’s future and even today provides 25% of cash flow. Even after Africa Oil Corporation’s increase in market capitalization, the company’s market capitalization is ~$570 million – indicating the $520 million deal is essentially its entire value.
It also removes the fact that Africa Oil Corporation’s cash pile made up ~75% of its market capitalization – it’s now been shifted to be a company with net debt.
However, the acquisition resulted in the company gaining an 8% interest in OML 127 (Agbama) and a 16% interest in OML 130 (Egina and Akpo). These fields result in the company being entitled to a net ~34 thousand barrels of daily production and 49.2 million barrels of 1P reserves. That gives the company a 1P reserve life of 4 years and a 2P reserve life of 6.5 years.
More importantly, these reserves only include the producing fields and don’t include undeveloped discoveries. The company has identified a number of exploration opportunities which should add to the impressive production and potential of these fields. Overall, these fields produce light, sweet crude oil supported by IMO 2020 regulation with a solid pricing relative to Brent crude.
More importantly, Africa Oil Corporation, through dividend paydowns, has $900 million in debt through the RBL loan drawn, plus a maximum of $368 million in spending for the tract ($250 million spent currently). Let’s currently assume that the total is $1.15 billion with the potential $118 million payment. That’s the amount of money Africa Oil Corporation will need to eventually pay back.
However, the field is incredibly profitable – average operating costs are just $7 / barrel with an operating netback estimate of $50.1 / barrel. POGV has its own hedging program with 95% of 2020 production hedged at $66 / barrel (a few percent above current Brent prices). That should help to support these incredible profits (cash flow is higher as the initial capital expenditures are complete and factored in the debt).
Utilizing the operating netback, the company will earn $622 million in cash flow per year. Simply subtracting operating costs from the income means roughly $730 million in cash flow per year. That’s simply astounding for a company with $1.15 billion in debt and a market capitalization of $570 million. The company will be able to rapidly payoff the debt and generate strong cash flow for shareholders.
This shows the enormous cash flow potential for Africa Oil Corporation from this field and its part of the reason the company’s market capitalization reacted so strongly to the deal. I expect it to continue growing as the cash flow generation of this deal becomes evident.
Africa Oil Corporation Kenya Project
The cash flow from this deal will be incredibly important for Africa Oil Corporation’s Kenya project and the capital spending this project needs to get off the ground.
Africa Oil Corporation Kenya Cargo – Africa Oil Corporation Investor Presentation
This project was also discussed in my other article, but it is a major oil project expected to reach its FID by year-end 2020. Phase 1 of the project is expected to startup by 2024 with production from 60-80 thousand barrels / day. Phase 2 of the project is expected to start up a few years later pushing up production to the 100-120 thousand barrels / day range.
This will continue into the mid / late 2030s. The first cargo sailed away in late-August 2019 with a cargo size of 240 thousand barrels. Production has already reached 2 thousand barrels / day – restricted by trucking infrastructure – and the Kenyan government expects a 500 thousand barrel cargo to be sent out again in February. The first cargo achieved a $3.5 / barrel discount to Brent.
The company has a 25% stake here, which means 125 thousand barrels. That means several million dollars in additional capital for Africa Oil Corporation. Consistent cash flow as the company progresses towards the FID will help support the future capital requirements for the project. The company has a potential farmout deal with Maersk (acquired by Total SA), but the amount they’ll pay won’t be known because its dependent on the FID timing. It could be up towards $500 million.
Either way, the Nigerian oil assets will help fund the development of this asset, which will support the company’s cash flow well into the 2030s and enable significant shareholder rewards.
Africa Oil Corporation Upcoming Catalysts
Backing up these strong Kenyan and Nigerian deepwater assets, along with the company’s equity stakes in other companies (worth $150 million currently), the company has a number of major catalysts into 2020.
Africa Oil Corporation Catalysts – Africa Oil Corporation Investor Presentation
Africa Oil Corporation’s first major catalyst is the Nigerian deal. Here the company will see an update on 2019 reserves and undeveloped discoveries. At the same time, the Preowei development will progress towards a FID. This development is expected to help maintain the overall production of the deepwater assets as other wells in the portfolio decline.
Additionally, the company has been focused on optimizing the POGBV capital structure. Post transaction, with the $250 million bridge loan, the company should have a net $70 million of cash – $65.6 million of which will be used for its 2020 capex and G&A budget. Additionally as we discussed above the company has $1.8 billion of loans on the books it used to payout dividends to partners.
For starters, the $250 million bridge loan with a 24 month tenure is expected to be repaid by up to 80% of the dividends paid to Africa Oil Corporation by POGBV. This alone indicates the company expects almost $160 million in annual dividends outside of the $1.8 billion loan. For a $520 million purchase price counting the term loan and a $570 million market capitalization those are some strong dividends.
Additionally, through 2020, the company plans to replace the reserve base loan (RBL) with $1.8 billion on it with raised bonds. These will be important to pay close attention to – it converts POGBV’s structure to a more traditional structure. Most important to pay attention to is the interest rate here on the $1.8 billion in bonds and what it means for the dividend payouts to shareholders.
I recommend shareholders pay close attention to this.
Other important catalysts to pay attention too are the FID on the Kenya project which we discussed above. Additionally, we need to discuss if this FID passes what will happen in terms of Total SA carrying the capital costs. I recommend investors pay close attention to this for 2020 – should it go through it could define the company’s production into the late-2030s.
Lastly are catalysts in the stakes that the company has an ownership stake in. These include valuing the Jethro discovery in Eco Atlantic Oil & Gas along with the potential discovery of light oil. This also includes 4 high impact wells being drilled by the company’s partners in South Africa and Namibia. These wells could help increase the company’s equity stakes which has already gone up significantly in a few years.
Africa Oil Corporation is up 30% since I originally recommended it 2 weeks ago. The catalyst here was the company’s Nigeria deepwater acquisition closing, resulting in the company acquiring 34 thousand barrels in daily production with an operating netback of more than $50/barrel. That’s a significant acquisition that should generate significant cash flow for the company.
Going forward, the company will be making a 2020 FID on the Kenya project. This project could support the company’s cash flow into the 2030s and is worth paying attention too. At the same time, the company’s equity investments in a number of other companies also have significant catalysts. The company is a strong long-term investment earning cash flow and I recommend holding on for the long run.
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Disclosure: I am/we are long AOIFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.