Transition in forward motion for Afentra
“…Whether and how much the share price might continue to rise beyond the conclusion of the deal is uncertain. Investors seeking a stake in AET may find that there will never be a better time to buy than now…”
When TMS last covered Africa-focused oil and gas acquisition vehicle Afentra (LON:AET) we found plenty of aspiration, but no significant interests other than a relatively modest holding inherited from the shell company out of which it formed.
Everything depended on the capacity of AET’s management team, stacked with former Tullow Oil directors, to draw on their undoubted industry experience and contacts to find a suitable deal. The signing of a major Sale and Purchase Agreement (SPA) with Angola’s national oil company this spring, igniting a share price surge, indicates that AET seems to be delivering. Formed last year out of the remnants of AIM small cap Sterling Energy by former Tullow CEO Paul McDade and Vice President Ian Cloke, AELT is backed by longtime oil and gas investor Richard Griffiths, and funds including Kite Lake Capital Management, Hadron Capital and Athos Capital. Another Tullow veteran, Anastasia Deulina, serves as Chief Financial Officer.
AET wants to take advantage of a market for African oil and gas assets from which the majors have been divesting, but which still harbour rich resources capable of supporting the world through the energy transition. Energy consultants Wood Mackenzie estimate the total value of hydrocarbon assets up for sale across the industry at more than $140bn. ExxonMobil, Chevron, BP, 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.
AET 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. Although smaller companies like Savannah Energy, and of course Tullow, have secured African assets, Mr McDade told Investors’ Chronicle West Africa was ‘around 15 years behind the North Sea’, in terms of established players selling off mature assets. But the energy crisis is forcing a rapid rewiring of the world’s energy infrastructure, which is being re-routed away from Russia. There is already an extensive pipeline infrastructure linking northern Africa and Europe, and well established LNG supply relationships. Europe’s RepowerEU plan is exploring ‘the export potential of sub-Saharan African countries’: according to energy consultancy Rystad Energy the continent is forecast to increase its gas output from about 260 billion cubic metres in 2022 to as much as 335 billion by the end of the decade.
AET went public with one African asset inherited 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 to analyse a 2D seismic acquisition programme undertaken in 2017 to help determine the prospectivity of a Mesozoic age sedimentary basin.
But the company’s overwhelming focus has been on securing a significant new acquisitions. Shortly after IPO Mr McDade told Energy Voice the company was aiming high, saying 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’. The company knows capital can only be secured in today’s oil and gas market by demonstrating a commitment to ESG. Mr McDade said: ‘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.’ He says the company has ‘embedded ESG into its operating model’, and 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, representing a Ghanian myth that tells of ‘transition in forward motion’.
The Sonangol deal
This April AET took a big step towards making good on its promises by securing an SPA to take significant interests in Blocks 3/05 and 23, offshore Angola, both majority owned by state oil company Sonangol. Under the agreement AEL would take a 20pc non-operated interest in Block 3/05, comprising eight mature producing fields located in the Lower Congo Basin discovered by Elf Petroleum in the early 1980s. Since assuming operatorship in 2005 Sonangol has focused on sustaining production through workovers and maintaining asset integrity: there have been no new drilling campaigns. The asset has a diverse portfolio of over 100 wells and currently produces from around 40 production wells. Facilities include 17 well-head and support platforms and four processing platforms. Average daily gross production last year was 17,000 bopd, with an exit rate of 21,000 bopd, and gross 2P reserves of approximately 100 million barrels at year end 2021. The Block offers the prospect of stable production of around 4,000 bopd at a breakeven oil price of $35 per barrel. There are three billion barrels of oil in place, and Net 2P reserves of around 20 million barrels.
AET would also take a 40pc stake in Block 23, a 5,000 km2 exploration and appraisal field located in the Kwanza basin in water depths from 600 to 1,600 metres with a working petroleum system. The Block contains the Azul oil discovery, with oil in place of around 150 million barrels, tested at flow rates of around 3,000 to 4,000 bopd of light oil. 3D and 2D seismic data sets are available, but the majority of the block remains under-explored.
The agreement commits AET to a total consideration of some $130m, $80m cash up front, and up to $50 million in contingent payments, payable over ten years from 2023. The company says the acquisition ‘is expected to be funded with new debt facilities and existing cash on the balance sheet. Discussions with prospective providers of debt finance are well advanced and will be finalised in due course.’ AEL’s most recent annual report stated cash resources as at 31 December 2021 of $37.7m (the company is debt free and fully carried for its Odewayne operations).
The deal is expected to be completed ‘in the third quarter of 2022’ subject to ‘the conclusion of AET’s due diligence exercise, the provision of a bank guarantee in respect of the 10pc transaction deposit and the completion of the right of first offer process by Sonangol’. The company says the acquisition will be consistent with its ESG agenda, stating that a ‘key outcome of the due diligence work to date has been to identify the opportunity to work with the Joint Venture to enhance the environmental performance of Block 3/05 through emissions reductions.’ Earlier this summer AET augmented the deal by agreeing with another stakeholder, Industrija Nafte, to acquire a further 4pc interest in Block 3/05 and 5.33pc interest in Block 3/05A. Upon completion of both transactions, AET would have initial 2P Reserves of around 24 million barrels and daily production of 4,680 bbl/d.
The news doubled AET’s share price from 15p to nearly 30p (it is still just under 29p at the time of writing), taking the company’s market cap to £65m, leaving would-be new investors to weigh how much further it can go. As oil and gas investors well know, a new venture’s share price can peak well before any production has actually taken place. Right now all looks good for AET on paper, but funding has to be secured, and Angola, troubled for many years by war and corruption, is still politically volatile.
Investing in Angola
Since the country’s civil war ended 20 years ago the ruling People’s Movement for the Liberation of Angola (MPLA) has overseen an oil and construction boom, making Angola one of the most oil-dependent economies in the world, dependent on hydrocarbons for more than 90pc of its exports. Under former president José Eduardo dos Santos, who ran the country for 38 years until 2017, Angola became one of the biggest and fastest-growing economies in Africa. But it has been plagued by corruption, and a somewhat vertiginous dependence on Chinese investment. The economy was further battered by the pandemic, shrinking by 10pc in the past five years, with inflation running above 25pc.
Though he was dos Santos’ handpicked replacement, current president João Lourenço, a veteran MPLA official, has shown a perhaps surprising resolve to put the country’s house in order, launching an anti-corruption drive against his predecessor’s family, and pushing through economic reforms including a much need devaluation of Angola’s inflated currency – which had once made capital city Luanda the most expensive in the world – and signing a $3.9bn loan facility with the IMF committing the government to fiscal discipline, transparent accounting and market reforms.
Angola is particularly keen to market its rich natural resources. Many of its existing oil and gas wells are ageing, production falling from some 1.9m barrels a day in 2008 to nearer 1.3m last year. Earlier this summer the state signalled its intention to continue to reduce Asian influence in the economy by seizing a stake in the nation’s biggest diamond miner from Chinese company LLI International, an act analysts interpreted as demonstrating a resolve to ‘clean up’ the country’s natural resources sector.
In his Investors’ Chronicle interview Mr McDade said ‘Angola has been early to recognise they need new investors.’ He said it would take time to work through the SPA because Sonangol was so focused on making sure the sale of the stakes in the blocks was done transparently. He also believed the country was well aware of the ESG sensitivities needed to secure capital: ‘Since we’ve re-engaged with Angola, as Afentra, they recognise the energy transition and how it’s impacting the major IOCs.’ Angola is currently in the later stages of a keenly fought election campaign, but the National Union for the Total Independence of Angola (Unita), the opposition party, is not thought likely to depart too much from MPLA’s economic strategy: the election is being fought over the territory of lingering corruption rather than economics.
Potential investors have plenty to consider then. Right now AET looks good on paper, on the cusp of a transformative deal that has certainly caught the market’s attention. The company’s value would seem set to rise further if it can be finalised, and funding secured. It seems the Angolan government – whichever wins the election – is on board: the country simply cannot afford to let revenue generating opportunities like this to pass by. Whether and how much the share price might continue to rise beyond the conclusion of the deal is uncertain. Investors seeking a stake in AET may find that there will never be a better time to buy than now.