One of my favourite stocks is Africa Energy (ticker AEC, listed in Stockholm).
The thesis there is simple – AEC has a 10% stake in one of the largest gas discoveries in the world (major investor and operator is Total). The deposit size is established, and Total is now finalizing the off-take agreement with the South Africa government. When this is done, AEC already declared that they would sell its 10% stake. The value of the stake is 3-5 times higher than AEC market capitalization. The investment thesis is detailed in the article below:
- Bloomberg article from yesterday: Coal-Reliant South Africa Is Turning to Gas Power – the main points:
- South Africa is the world´s 12th biggest source of greenhouse gasses
- 80% of its electricity is produced from coal
- The government aims to cut emissions to net zero by 2050.
- SA plans to use natural gas to produce at least 25% of almost 12,000MW of additional power by 2030
- SA already imports gas from Mozambique, but further gas development there is limited by an Islamist insurgency.
- The primary source of gas for the SA´s is the 11B/12B that AEC owns 10%.
2. Comments from Africa Energy management:
I communicated with the AEC management yesterday (the bold emphasis was added by me):
Q: Any update on the Energy Bill?
We do not know how long Parliament will take to approve the new Petroleum Bill. Most estimate the process will take at least 12 months (i.e., mid-2022). Keep in mind that Block 11B/12B is grandfathered for any changes, so the Petroleum Bill should not affect our development plans.
Q: Update on 11B/12B?
On Block 11B/12B, Total is working on the fast-track development concept, which will likely rely on nearby infrastructure and gas demand in Mossel Bay. Total is also discussing gas marketing with the government, which owns both the Eskom diesel power plant and the PetroSA gas-to-liquids (GTL) plant in Mossel Bay.
The diesel power plant is able to burn natural gas and would like to switch fuels as soon as possible. Also, the GTL plant has been stopped with no feedstock since December 2020 because the Block 9 gas production has been depleted. We expect Total to conclude this process and apply for the Production Right before the Exploration Right expires in September 2022.
Q: Update on 2B?
On Block 2B, Azinam has identified several rigs that can drill the Gazania well this year, and we expect them to contract the best option soon.
Comments on the above
All are very bullish for AEC. The share price has been underperforming, as the retail investors are losing patience. I think the stock should regain traction, as many catalysts are coming in H2:
- News-flow on 2B drilling. Markets like news-flow, here we will have a flow of news coming in H2: retaining the rig, rig starts to move to Gazania, rig arrives in Gazania, drilling commences, awaiting results…. All these news should drive an interest in the stock.
- Drilling results on 2B – the seismic indicates 300 million barrel potential, which is very material for AEC
- SA off-take agreement – the Total negotiations with SA are ongoing. As the Bloomberg article describes, the SA needs gas for electricity. Pareto stated that they expect Total to reach the agreement by October 2021. That would be a major catalyst for AEC stock because with an off-take agreement in hand AEC should be able to sell the 10% stake.
- Block 11B/12B disposal – I asked a Norwegian oil analyst from one of the top brokerages how difficult it would be for AEC to sell the block with an off-take agreement in hand. I was told it would be relatively easy. If that is right, we could see the disposal in 1H22.
AEC is a very attractive oil play. AEC ais due to sell the stake in one of the largest gas discoveries. The value of the stake should be three to five times higher than its capitalization.
AEC repeatedly stated they would distribute the proceeds as a dividend. My base case is, that this should happen in the next 12 months.
When this happens, investors multiply their investments. The only question is whether three times or five times.
I consider this a good risk-reward.