Africa Energy – excellent update from Pareto conference – valuation impact assessment

Garrett Soden delivered excellent performance at the Pareto Energy conference in Oslo yesterday.

AEC is my top oil company position. I believe it has a potential to triple over the next 12 months.

There is one big difference between AEC and other oil plays. There are many oil companies that have great portfolios and are buying cheaply oil assets from the majors. Where AEC differs is – it has one of the top gas condensate assets that it is intends to sell. Pareto believes the sale chould happen within 12 months. The sales price is most likely a multiple of its current market capitalization. If there is a low risk high return play, it is AEC.

Do watch the presentation, it is only 17 minutes – link is below.

Selected quotes by Garrett Soden, AEC’s CEO:

“Both 11B/12B discoveries are among the top five global discoveries in the last few years”

“…in Block 2B Azinam recently completed a well site survey and identified a semi-submersiblerig to drill a high-impact oil exploration well later this year. We expect to be fully carried on this. … It is very exciting exploration well – according to IHS, it is one of the top highimpact wells for 2021. It has over 300 million barrels of prospective resource. The prospect is relatively lowriskand it is very material to AEC shareholders… We retained 27.5% interest and this alone could be a companymaker. We know there is oil in the basin, and, because of the good commercial terms, we know that discovered oil in South Africa is very valuable and potentially there is a lot here. Across the block, there is up to a billion barrels of prospective resource .”. 

“We focus on South Africa for good reasons….. good commercial terms and very little production of gas right now. South Africa generates 90% of electricity from coal. It signed theParis protocol and wants to diversify its electricity production away from coal to gas. Except for expensive imports, it has few alternatives to do so. Block 11B/12B is the best domestic solution.”

“11B/12B is the best place to have a gas discovery, because you have an existing infrastructure nearby. There is a pipe only 70 km from our discovery, that goes to existing demand with a power generating facility in Mossel bay, that is currently burning expensive diesel…”

Also, there is a gas-to-liquids facility that was previously buying gas at USD 6-7 per Mcf. That production has now been depleted, and the facility is desperate for additional feedstock…”

…11B/12B originally had five giant prospectstextbook examples of what you want to see on seismic. It is the best thing our exploration team has ever seen… Both Brulpadda and Luiperd drilling results were better than expected… Total is now moving to development”

“Total is working on the development concept and negotiating the gas off-take agreement with the government.”

“Pre-drill estimates were above 500 million barrels for each of these prospects. The economics of this are very compelling. Using conservative assumptions of 6 USD per Mcf and 60 USD per barrel… The net present value of this is more than 5 USD per discovered barrel. Just this asset alone is worth a big premium to our current market capitalization.”

“Luiperd drilling results were better than expected. … It is very high-yielding gas condensate. We have excellent reservoir quality… with higher than expected productivity and higher than expected reservoir connectivity we expect to drill fewer drills to produce the resource. That is very positive for the development costs”

“We have de-risked the deposit, the next step is above ground. Total is finalizing the development concept and the gas price negotiations for the off-take agreement.”

“In summary we have net exposure to hundreds of millions of barrels of prospective resource. We have world class assets… we have probably the best exploration team in Africa … I believe we are undervalued. We have a floor value in the development and we have bluesky upside from the exploration.”

“I believe we can more than double our net asset value over the next 12 months and we have plenty of newsflow coming. It is a great time to be watching the stock.”

Video link:

Implications from the call

Let’s do simple math:

• Garrett mentioned that pre-drill expectations were at least 500 million barrels for each of the five original prospects on block 11B/12B. He says that net present value of a discovery is about USD 5 per barrel. This means that each of the five deposits in 11B/12B could have a value of five times USD 500 million which equals USD 2.5 billion. Africa Energy owns 10%, so the value of each of the five deposits is USD 250 million.

• Garrett mentioned that these were pre-drill estimates and the two discoveries were better than expected. 

• The current market capitalization of AEC is USD 330 million. AEC’s stake in Brulpadda and Luiperd together represents at least USD 500 Million – 50% above its current share price. That is what Garrett meant when he stated that the current discoveries represent a floor for AEC share price. 

• After the discovery, it was announced that the Brulpadda deposit was potentially 1 billion barrels. AEC estimated that Luiperd is 50% bigger than Brulpadda. Together the deposits could represent 2.5 billion barrels. Using the USD 5 per barrel net present value, AEC’s stake in those two deposits could be USD 1.25 billion, which is almost 4 times its current market capitalization.

• The above is the valuation for only the two deposits. The above neglects the value of three additional prospects at 11B/12B and also excludes the value of 2B, which Garrett indicated could have a higher valuation per barrel value if oil.

• As Garrett indicated, the share price is undervalued and the value of its prospects has a blue sky limit. It is certainly several times its current market cap.

The Pareto analyst estimates that Total could finalize the gas off-take agreement with SA Government by October. Pareto also estimates that, with the off-take in hand, AEC could easily sell its stake in 11B/12B. Based on this, I assume this could all happen in the next 12 months. I believe AEC is the most attractive opportunity in the oil space.


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