RBC Report re: Afica Oil .. TSXV: AOI
posted on
Mar 31, 2014 11:41PM
We may not make much money, but we sure have a lot of fun!
EQUITY RESEARCH
RBC Europe Limited
Al Stanton (Analyst)
+44 131 222 3638
al.stanton@rbccm.com
Victoria McCulloch, CA
(Associate)
+44 131 222 4909
victoria.mcculloch@rbccm.com
Haydn Rodgers, CA
(Associate)
+44 0131 222 4911
haydn.rodgers@rbccm.com
Outperform
Speculative Risk
TSXV: AOI; CAD 7.22
Price Target CAD 14.00 ↓ 18.00
WHAT'S INSIDE
Rating/Risk Change Price Target Change
In-Depth Report Est. Change
Preview News Analysis
Scenario Analysis*
Downside
Scenario
4.50
38%
Current
Price
7.22
Price
Target
14.00
94%
Upside
Scenario
20.00
177%
*Implied Total Returns
Key Statistics
Shares O/S (MM): 310.5
Dividend: 0.00
NAVPS: 14.12
Market Cap (MM): 2,242
Yield: 0.0%
P/NAVPS: 0.5x
Strategic Ownership:
RBC Estimates
FY Dec 2012A 2013A 2014E 2015E
Production (boe/
d)
0 0 0 0
P/FFO NM NM NM NM
CFPS Basic (0.04) (0.04) (0.06) (0.08)
Prev. (0.03) (0.05) (0.06)
P/CFPS NM NM NM NM
EPS, Ops Basic (0.08) (0.11) (0.08) (0.11)
Prev. (0.06) (0.07) (0.09)
P/E NM NM NM NM
All market data in CAD; all financial data in USD.
March 31, 2014
Africa Oil Corp.
A Bird In The Hand And Two More In The Bush
Our view: Tangible NAV of C$6.73/share underpins the stock, and we see the potential for steady growth in the Lokichar Basin. Wildcat exploration is increasingly a free option.
Key points:
Valuation: We have updated our Africa Oil NAV for last week’s drilling
results, its FY13 results and management’s latest guidance on costs. The
net impact is an increase in our Tangible NAV to C$6.73/share from
C$6.56/share - Africa Oil ended 2013 with cash of $490m, and the
company is budgeted to spend ~$350m in 2014, including ~$245m on
drilling, which is down on our previous estimates. The fall in our Total NAV, to C$14.12/share from $15.39/share, reflects disappointing news from Emong-1, Ekales-1DST and Etuko-2.
Tangible Value: In early May 2014, Africa Oil is scheduled to publish
a resources update that we expect to include a substantial increase in
contingent resources - Amosing and Agete are being billed as notable
successes. Our C$6.73/share Tangible NAV is based upon 660mmbbl of
gross resources in six discoveries; the untested Ewoi discovery is included
in Risked Upside.
Progress: Tullow and Africa Oil are looking to fast-track the Lokichar Basin developments and, working with the Kenyan and Ugandan governments, their goal is to achieve project sanction by end 2015/early 2016. We expect Tullow to utilise its June 25th Capital Market Day to provide a roadmap to first oil.
Upside: Appraisal drilling on Twiga, Ngamia and Amosing through Q2/14 should help de-risk the existing accumulations; moreover, a number of the reservoirs are expected to thicken/improve down-dip. However, the market will be hoping for more discoveries in the Lokichar Basin and wells to watch include the imminent Ekunyuk-1 well and Etom-1, which will target a large complex at the northern end of the basin.
Blue-sky: Africa Oil exposes shareholders to significant upside potential
outside the Lokichar Basin. In late March Africa Oil is scheduled to
participate in Shimela-1, the first in a series of wells with basin-opening
potential. Our Africa Oil NAV includes upside/risk of +C$8.51/-C$1.08 per
share for the individual wells; however, we believe this understates the
value of establishing a new oil province.
Risks: Although the share price includes little value for Africa Oil’s wildcat campaigns, a run of dry holes would weigh on the share price, and investors looking ahead to 2015 will see a shortfall in the company’s
finances. With that said, we believe the Lokichar Basin business would be
a neat acquisition target.
Target/Upside/Downside Scenarios
Exhibit 1: Africa Oil Corp.
30m
20m
10m
N D J F M A M J J A S O N
2012
D J F M A M J J A S O N
2013
D J F
2014
M
UPSIDE 20.00
TARGET 14.00
CURRENT 7.22
DOWNSIDE 4.50
Mar 2015
21.00
9.00
5.00
3.00
1.00
125 Weeks 07NOV11 - 28MAR14
AOI CN Rel. S&P/TSX COMP IDX MA 40 weeks
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target
Target price/ base case
We estimate that the lower risk exploration and appraisal
wells in Africa Oil’s ongoing exploration campaign could drive
the share price towards C$14. And, having secured funding, in
H2/13, for drilling campaigns that extend into 2015, funding is
not a near term concern. Consequently we have set our target
price in line with our PV10% NAV.
Upside scenario
Africa Oil exposes shareholders to significant upside potential
outwith the Lokichar Basin. In late March 2014 Africa Oil is
scheduled to spud Shimela-1, the first in a series of wells
with basin-opening potential. Our NAV includes upside/risk
of +C$8.51/-C$1.08 per share for these high-risk high-reward
wells; but in the event of success in a new basin this metric
likely understates the upside potential, hence our C$20 value.
Downside scenario
Exploration drilling is not without risk, and in the event of a
sustained dry run, we could see the market refocusing on the
company’s more tangible assets – its contingent resources and
net cash. Assuming a tightening balance sheet attention could
likely focus on our PV15% Tangible NAV of ~C$4.50/share.
Investment Summary
Management has a strong track record for value creation
at its previous ventures, which include Tanganyika Oil and
Valkyries Petroleum; and the company’s portfolio of Tertiary
Rift acreage has been endorsed by Tullow Oil, which has a track
record for exploration success in neighbouring Uganda.
The FTSE100 explorer holds 50% operated stakes in Africa Oil’s key
blocks. Africa Oil participated in the high-profile, Tullow-operated,
Ngamia and Twiga South oil discoveries in the East African Tertiary Rift Basin, in Kenya; the company has a substantial acreage position – some 80,000 square kilometers, encompassing five key basins – that offers the potential for repeat successes.
Having established a working hydrocarbon system in the
Lokichar Basin, in Kenya, the drilling targets within the basin
have grown in size and number; this is we believe analogous to
Tullow Oil and Heritage Oil's success in the Albertine Graben
of Uganda and Cairn Energy's success in the Barmer Basin of
Rajasthan.
Cost Savings: We note that the operator, Tullow Oil, is moving up the ‘learning curve’ and drilling times and logistics costs have been cut; consequently South Lokichar Basin wells are now running at $15-20m (untested), and basin-opening wells are budgeted to cost $25-30m
(untested).
Exhibit 2: Tullow Kenya Drilling Performance
Source Company data
Bluesky: In late March Tullow is scheduled to spud Shimela-1 (+C$0.20/-C$0.03), which isintended to test the potential of the undrilled Chew Bahir Basin, in southern Ethiopia. Otherwells with basin-opening potential scheduled for mid 2014 are in the South Kerio Basin
(Dyepa-1, +C$0.64/-C$0.16), North Kerio Basin (Aze-1, +C$2.84/-C$0.25), and Lake Turkana Basin (Kiboko-1, +C$0.78/-C$0.14). Away from the Tullow-operated acreage, Africa Oil is also participating in the high-risk high-reward Sala-1 well (Pundamilia, +C$3.31/-C$0.37) on Block
9, in Kenya’ Anza Graben, and the El Kuran-3 well, (+C$0.78/-C$0.14) on Block 7/8, in Ogoden Basin of Ethiopia.
Exhibit 3: Africa Oil’s expected 2014 drilling schedule
Oil Gas 2014E
Planned Dry Hole Q1 Q2 Q3 Q4
Kenya/Ethiopia Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Weatherford-804 Emong-1 Ekunyuk-1 Dyepa-1 Ekosowan-1
Sakson PR-5 Twiga South-2 Amosing-2 Kiboko-1
PR Marmon Etuko-2 Ngamia-2 Aze-1
SMP-5 Ekales-1 Agete-1 DST Etom-1
Rig 5 Shimela-1 Gardim-1
GW-190 Sala-1
Rig 7 El Kuran-3
Source: Company reports and RBC Capital Markets estimates
Africa Oil Corp.
On a sum-of-the-parts basis, we value Africa Oil at C$14.12/share. Our PV10% includes C$0.36 for net financials, a further C$6.37/share for its risked contingent resources and C$7.39/share for its exploration campaign.
Given the potential for repeat success, and the lessons learnt from Tullow/Heritage in Uganda and Cairn in Rajasthan, we have set our target price in line with our Total NAV, at C$14/share.
Our target price is based upon our view that the lower risk exploration and appraisal wells in Africa Oil’s ongoing exploration campaign could drive the share price towards C$14/share.
Having secured funding, in H2/13, for its drilling campaigns that extend into 2015, funding is not a near term concern.
Price target impediments
Frontier exploration is inherently risky, and Africa Oil’s share price appears to be discounting discoveries well in excess of what we believe has been discovered to date - our risked value of the contingent resources and net finances is C$6.56/share; consequently there are risks to the downside.
Based upon our estimates Africa Oil will need additional cash in Q1/14, and, to deliver its remaining prospect inventory we estimate that the company will need to spend $250-300m on drilling through 2014. That said, we believe that the dilutive effect of a placing, at or around
the current share price, would be more than offset by the expansion of Africa Oil's funded exploration and appraisal drilling campaign.
Company description
Africa Oil is a Canada domiciled company whose shares are traded on the TSX Venture Exchange and the First North list of the NASDAQ OMX Stock Exchange in Sweden under the ticker “AOI”. It is an East Africa-focused oil exploration company with acreage in Kenya and
Ethiopia.
Africa Oil has participated in the high-profile, Tullow-operated, Ngamia 1, Twiga South and Etuko discoveries in the East African Tertiary Rift Basin, in Kenya; the company has a substantial acreage position – some 80,000 square kilometres, encompassing five key basins – that offers the potential for repeat successes.