The impressive strides made by oil explorer and producer Afren (LON:AFR) in performance have convinced analysts at Investec to put out a bullish take on the group’s prospects.
Afren has always been keen to stress its ‘pan-African’ credentials, with some justification it has to be said, as its portfolio now extends to 29 assets in 11 countries, from Nigeria, Ghana, Côte d’Ivoire, Nigeria and São Tomé & Príncipe JDZ, Congo Brazzaville and South Africa, through to new East African opportunities in Ethiopia, Kenya, Madagascar, the Seychelles and Tanzania.
For Investec analysts Angus McPhail and Stuart Joyner, Afren’s effective performance to date, and its promising growth trajectory, is enough to class the company as ‘a low risk, high return’ pure oil and gas play. They recommend the shares as a ‘buy’ with a target price of 192p.
Mid-afternoon today its share price stood at 168p, valuing the company at £1.66bn. Over a 12 and six month period the shares have put on 110% and 20% respectively.
Drilling down into Investec’s valuation, the broker notes that the main components supporting its NAV-based valuation of 192p/ share are the group’s producing and developing assets in Nigeria. The valuation assumes long-term oil and gas prices of US$90/barrel and US$6/ thousand cubic feet (mcf) and also includes consideration of aspects such as its exploration and appraisal prospects for 2011/12.
Of the core NAV of 126p, 90% is derived from Nigeria, underlining the importance of the country to Afren’s operations. The company has been busy snapping up assets there, including the OML 26 and Okwok prospects. But Afren’s key project there, and its ‘jewel in the crown’, is Ebok, which accounts for half the total core NAV.
Ebok’s importance to Afren is clear: it is a producing asset, with volumes from the operation set to be ramped up “significantly” over the next 2-3 years.
To reach its target price of 192p/share, Investec has attributed 67p/share to cover risked exploration upside. Afren has indicated capex of US$410m for 2011, with around 80% of this amount being spent on the Ebok-Okwok-OML 115 area, with the majority of the remainder being spent on exploration.
The broker adds: “Given current cash flow and the bond issuance, we believe that Afren can fund its 2011/2012 budgets comfortably and indeed could be cash positive by the end of 2012E.”
The group currently boasts around 3.4 billion barrels of prospective resources overall. The ongoing expansion of Ebok, in which it has a 50% working interest, provides the cashflow for exploration work.
Ebok, located offshore, was originally awarded to Oriental in May 2007 by the ExxonMobil / Nigerian National Petroleum venture. In 2008, Afren signed a Farm-In Agreement with Oriental to participate in the development of Ebok. Under the terms of this agreement, Afren is responsible for funding all capital and operating costs for the development of the field and will recover the costs (with interest) from 100% of field revenues.
Development of Ebok is being carried out in stages. Phase 1 has been steadily increased to a sustained flow rate in excess of 17,000 barrels of oil per day (bopd) from five wells, ahead of pre start-up expectations. Phase 2 development drilling is currently underway and is expected to result in production at a rate of 20,000 bopd in 2011.
Investec believes Afren’s strategy of acquiring cheap undeveloped barrels in Nigeria means group cashflows are set to grow significantly with the development of Ebok. Across the Niger Delta overall, the company has six prospects under its belt, the largest being OPL 310, with gross prospective resources estimated at over 500 million. Afren has a 70% working interest in OPL 310.
The broker is confident that, based on its forecasts, Afren will have net cash on its balance sheet by the end of 2012. It expects some of this cash to be utilised to target acquisitions to grow the business further.
Positive investor sentiment over the stock was reinforced by its full year results in March. For the year to December 2010 the company posted a pretax profit of US$79 million versus just US$500,000 in 2009 on turnover down US$16 million to US$320 million. The results benefited from stronger oil prices but even still the operational performance was very healthy.
Not surprisingly the company expressed considerable confidence over the outlook in its full year statement, indicating a 180% growth in production to 40,000 barrels of oil equivalent per day for 2011. Afren added that the expected growth in its West Africa base will allow it to pursue ‘multiple high impact exploration targets in both East and West Africa” as well as enable it to continue with its acquisition plans.