Africa Energy – Minutes from the Call with the Management

Our family office had an opportunity to have a call with the Africa Energy (AEC) management on Monday 10/1/2021.

There will be a lot of traction for AEC in 2022 . Further, during 2022 AEC will get into a position to be able to sell its major asset 11B/12B. As I wrote here before, I believe that the market value of 11B/12B stake is multiple time higher than AEC market capitalization today. See previous post on AEC for details. Should be a good year for AEC shareholders.

I enclose the call summary below:

Block 2B Update

  • AEC has a 27.5% stake in Block 2B and is carried on the upcoming well. The block is operated by Azinam.
  • On Monday, 10 January, Eco Atlantic announced acquiring Azinam in a share exchange transaction.
  • Eco Atlantic is a public company from the Lundin group. Africa Oil (another Lundin group company and AEC shareholder) has around 20% stake in Eco Atlantic.  
  • Azinam was rumoured to face a potential lack of funding for the 2B drilling. This is now resolved. Eco Atlantic stated it is already in discussions with existing shareholders to secure financing. Africa Oil confirmed it is ready to provide the capital.
  • The above increases the certainty of the 2B drilling campaign timetable.
  • The rig negotiations are ongoing. The rig contract should be signed in the next month or so.
  • The most likely rig is located in the North Sea and will be available from June or July this year. After that, it could start moving to South Africa.
  • The trip to South Africa would take about 45 days. Eco Atlantic said it would drill the 2B in the second half of the year. The AEC management believes that 2B drilling may happen already in Q3 before the licence expires in November.
  • There should be a lot of newsflow in Q3 on the 2B rig move and drilling campaign.

Block 11B/12B Update

  • AEC has an effective 10% stake in Block 11B/12B. The block is operated by Total.
  • Total is still negotiating the gas price with the South African Government. Total hopes to have it done in the next month or so.
  • Total promised first gas to the SA government by 2025. If the gas price negotiations get further delayed, the 2025 production goal could be at risk.
  • The form of the gas price agreement would be a Memorandum of Understanding (MoU).
  • The MoU is the basis for the offtake agreement. The gas price is the essential part of it.
  • The next major step would be the Application for the Production Right (license). At the moment, the consortium has the Exploration Right (licence). The exploration right expires in September. When you have a discovery, you apply for a production right. It is a one- to two-year process. The Application includes development plans and environmental permit applications that the SA government must approve.
  • The Application for the Production Right would be submitted shortly after the gas price agreement. If the gas price agreement is reached in January or February, the Application could be submitted by March this year.
  • The SA government indicated they would fast track the approval process as gas production is its priority. The Application should be approved in 2023.
  • After the approval, Total will make a Final Investment Decision (FID). After that, Total will start to work on the production wells at Luiperd. The drilling could begin in 2024, and commercial gas production could start in 2025. Based on the current timeline, there would be no material cash requirements for AEC until 2023-2024.
  • The priority is gas deliveries to South Africa. Gas exports to Europe could be considered after the production to SA begins.
  • The new Energy Bill negotiated by the SA parliament should be approved in Q2/Q3. It does not affect 11B/12B, which is grandfathered – but it would be positive for the industry. The industry has seen and commented on the bill; no surprises there.

Timing of AEC´s disposal of 11B/12B

  • AEC management repeatedly stated that AEC wants to sell the 11B/12B position before the commercialization to realize the gains.
  • The minimum requirement for sale is to have a tangible project with clear economics – you need a gas price agreement and the Application for Production Right submitted.
  • At that point, the majors would be interested in buying. This stage should be achieved this year.
  • Value for 11B/12B will increase as there is further progress. A higher price for the asset might be realized after Total reaches the final decision on the commercialization of the project, which should happen in 2023.
  • The AEC investors can therefore expect the disposal could happen any time in 2022-2023.

Block PEL37 Update

  • Shell and Total are drilling offshore Namibia. Shell‘s results are rumored to be very positive.
  • A positive outcome would renew investor interest in Namibia. In such a case, the value of AEC’s acreage there would increase, and the likelihood of additional drilling around PEL37 increases.

Near Term Catalysts for 2B

  • contracting the rig – 1Q22
  • Total and Shell drilling results from nearby wells – Jan/Feb
  • Eco closing the Azinam deal – 1Q22
  • Eco completion of financing for 2B drilling – 1Q22
  • rig starts to move to SA (45 days) – 3Q22
  • drilling (30 days) – 3Q22

Near Term Catalysts for 11B/12B

  • Gas price MOU – January/February
  • Application for Production Right – 1Q22

General Catalyst for South Africa

  • Energy bill final – 2Q/3Q22

Our summary

There are plenty of catalysts scheduled for this year. The Q1 and Q3 should be especially strong with catalysts.

The gas price agreement and submission of the Application for the Production Right should be the major price drivers in Q1 for 11B/12B. That would be supported by the rig contract and closing of the financing for 2B by Eco Atlantic.

In Q3 there will be plenty of newsflows related to rig movement to SA and subsequent drilling. AEC share price has historically moved strongly on such news.

From Q3, AEC should be in a position to sell the 11B/12B. The transaction is the major catalyst for AEC.

In summary, 2022 should be a rewarding year for AEC investors.

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Disclosure: 

The goal of the blog is to provide investment ideas for further research.

I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.

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