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.