Its transition in forward motion for Afentra
“…we think it’s worth watching to see if the experienced Afentra management team can indeed make good use of their network, and on their promises to show that independents can be trusted…”
The reality of the energy transition – as we covered in our summer feature on the future of the oil and gas industry – is that fossil fuels will be with us for some time to come, keeping the lights on in the developed world for a while yet, and supporting the continued growth of developing nations. So if we need them, we need to ensure they are managed responsibly.
That’s the essence of the investment case made by Africa-focused oil and gas play Afentra (LON:AEL), set out on a company website and corporate presentations that exhibit the communications polish that might be expected of a management team comprised of former directors of the FTSE 250 exploration and production company Tullow Oil.
Although broad swathes of the African economy are developing quickly, many of the continent’s 1.2 billion people still do not yet have access to modern cheap reliable energy. Under immense political and investor pressure to reduce their carbon footprint, oil majors are beginning to offload African fossil fuel assets that remain important for the continent’s continued development.
A trusted partner
Afentra is bidding to establish itself as a ‘trusted partner’ to oil companies divesting legacy African assets, and the governments of the countries in which they are located. And it wants to do so responsibly, ‘through focused operational excellence’ that will employ ‘cost-effective opportunities to bring down the emissions intensity of delivered Oil & Gas by minimising flaring of associated gas and venting of CO2, tackling methane emissions, and integrating renewables and low-carbon energy wherever possible.’ The company has embraced the UN’s Sustainable Development Goals and has ‘embedded ESG into its operating model’. It has even bound the words ‘African energy transition’ into its name – Af-en-tra – and its logo, a stylised bird with its head turned backwards and feet facing forward, represents a Ghanian myth that tells of ‘transition in forward motion’.
Formed earlier this year out of the shell of moribund AIM small cap Sterling Energy by former Tullow CEO and Vice President Paul McDade and Ian Cloke, Afentra is not yet much more than a promising idea. Speaking to Energy Voice shortly after the takeover Mr McDade said Sterling had been purchased not ‘for its history but as a vehicle to rebrand and relaunch’. The new venture is backed by longtime oil and gas investor Richard Griffiths, and funds including Kite Lake Capital Management, Hadron Capital and Athos Capital, with Mr McDade and Mr Cloke holding about 3pc between them. The pair were joined shortly after the relaunch by another Tullow veteran, Anastasia Deulina, who serves as Chief Financial Officer.
Afentra inherits one asset from Sterling, a 34pc interest in the Odewayne Exploration block, an undrilled 22,840 km2 frontier field in Somaliland’s rift basin. The company is working with Joint Venture partner Genel Energy, which holds a majority stake in Odewayne, to analyse a 2D seismic acquisition programme undertaken in 2017 to help determine the prospectivity of a Mesozoic age sedimentary basin.
But Afentra is effectively beginning with a blank slate. Everything depends on the team’s ability to convert the African expertise they developed during their years at Tullow into suitable opportunities. On Afentra’s launch Mr McDade said that the ‘team is actively screening a pipeline of opportunities, consistent with the strategy and aims to announce a transaction within the next 12 months.’ He told Energy Voice that the ‘primary focus is on material production. We don’t want 1,000-2,000 barrels per day, we’re looking for multiple tens of thousands. We have the operating capability and we have a team who have been used to working at high standards’. He believes the company’s focus on ESG will be critical to unlocking capital: ‘I talked to a lot of capital providers. The conclusion was that capital was available and that public markets were the best way to go. To access that capital, though, you have to really understand investors’ ESG concerns.’ In another interview, with the Financial Times, he said he expected a host of assets ‘of the right’ scale would become available, with ‘many more over the next five to 10 years’.
Afentra is betting that ownership trends within the African oil and gas sector will follow those in the Gulf of Mexico and the North Sea, where nimble operators like Talisman Energy, Apache Energy, Siccar Point and HitecVision have capitalised on the offloading of assets by BP, Shell, Total and others. The company’s ESG focus has parallels with developments in related industries. South African miner Thungela Resources, for example, spun out from Anglo American, bases its investment case on the claim that it can meet Asia’s continued demand for thermal coal more responsibly than larger operators. Afentra already has the financial firepower to begin making meaningful acquisitions, the company’s results to 30 June 2021 reporting cash resources of $40.8m, and a debt free status, with the costs for its Odewayne operations fully carried by its JV partners.
The company has committed itself to an African economy that, though beset by long standing economic challenges, continues to tantalise with promise. The continent has struggled to recapture the momentum it seemed to be gaining before the financial crisis, with the MSCI FM Africa index now some 35pc below the levels reached during the 2000s. It is still plagued by low skills and limited educational opportunities, a relatively poor infrastructure, and endemic corruption.
But an Investors’ Chronicle overview noted it also bears all of the characteristics of a region primed for growth: ‘low or lowish per capita value added, implying scope to rise; lively inflation, implying, among other factors, an excess of domestic demand over supply; a deficit on current account, indicating both excess domestic demand and the importation of capital goods to help improve domestic supply’. Nigeria, South Africa, Zimbabwe and other troubled nations get the headlines, but most African countries are growing significantly faster than those of developed nations, and China continues to invest billons into the continent’s economy, taking advantage of its collective trend towards urbanisation, and the presence of a dynamic alternative to Asia’s older and more expensive workforce. Consultants McKinsey estimate that some 10,000 Chinese firms operate in Africa, 90pc of them privately owned.
The region is rich in low-cost natural resources, including hydrocarbons, and interconnected through a lattice of free trade agreements, the most ambitious yet, the African Continental Free Trade Area, signed earlier this year. The continent’s oil and gas sector is best known for the major discoveries made off its western coast in recent years, but just last month its onshore infrastructure was boosted by an agreement between Uganda, Tanzania and oil major Total to build a $3.5bn heated pipeline to connect oilfields near Lake Albert to the Tanzanian seaport of Tanga.
Changing ownership patterns
Afentra is also right to emphasise changing ownership patterns within the hydrocarbons sector. Energy consultants Wood Mackenzie estimate the total value of oil and gas assets up for sale across the industry at more than $140bn. ExxonMobil, Chevron, BP, Royal Dutch Shell, Total and Eni alone have sold $28.1bn in assets since 2018, and the majors are targeting further disposals of more than $30bn in the next few years. Wood Mackenzie expects independents to play a much greater role in pushing forward investment in Asia and Africa.
The company will have to overcome investor – and activist – suspicions that the offloading of oil and gas assets by the majors gives smaller operators that are not subject to the same scrutiny free reign to pollute. BP, for example, was embarrassed by recent revelations that Hilcorp Energy, an independent to which it sold its Alaskan assets, had within months allowed their greenhouse gas emissions to rise significantly. Another concern is that smaller companies may not have the financial strength to meet the challenges that catastrophic failures can present, leaving host governments to clear up the expensive mess. What might have happened, for example, if the Deepwater disaster had occurred under the oversight of highly leveraged private equity-backed independents rather than BP?
Turning the page on Tullow?
For all their undoubted African experience Afentra’s management bear the scars of their troubled final years with Tullow. Mr McDade and Mr Cloke left in December 2019 when shares in Tullow plunged more than 70pc after highly promising Guyanan assets disappointed the markets. Tullow rode a boom in oil prices for more than a decade, its shares rising by an average of almost 30pc a year between 2000 and 2012, before crashing back to earth in 2019 when two significant discoveries in waters off Guyana delivered much heavier oil than its forecasts had led investors to expect, forcing the company to concede that there had been ‘material errors made in projecting forward production at Tullow’. Tullow has since recovered somewhat, returning to profit in the first six months of the year after securing its future earlier this summer through a critical $1.8bn bond offering.
Afendra certainly presents itself with a professionalism that bears the mark of its directors’ corporate experience. But the market will pay close attention to its progress in making good on those claims. The Tullow takeover woke Sterling Energy’s share price from its slumber, the revamped company’s stocks surging from 11p to a high of 18p within a matter of weeks. The price has since hovered around 15p.
Right now Afentra is a highly speculative venture with much to prove. But we think it’s worth watching to see if its experienced management team can indeed make good use of their network, and on their promises to show that independents can be trusted with the sensitive management of fossil fuel assets through the energy transition.