Pareto: Africa Energy – Stars aligning & Significant news flow ahead

AEC is our top conviction plays in Energy. Pareto Securities is fully on board. Below is a summary of their latest research. The stock should double in next months.

Pareto research Summary:

Stars aligning & Significant news flow ahead 
Africa Energy is down yoy (vs peers up >50%) despite commodity prices advancing, which we believe is caused by lack of news flow. This will change imminently driven by drilling of the Gazania prospect (SEK 2.5-3.0/share potential if successful) and upcoming catalysts on the development of the vast discovered resources at Block 11B/12B. In addition, we think the market has overlooked the increased strategic value of Africa Energy’s portfolio as energy security and gas exposure (increasingly seen as an enabler for energy transition) are becoming key themes in the industry. We think the stock can double over the next months and reiterate BUY/TP SEK 4.50. Drilling at Block 2B expected to commence in early September

We expect the rig move for the Gazania-1 well (27-5% WI) to be announced shortly with drilling start in early September and results 25-30 days thereafter. The well is fully carried by the partners (Eco Atlantic (operator), Panoro and Crown Energy) and has a unrisked potential of >300 mill boe gross of oil. We estimate a value potential of SEK 2.5-3.0/share net to Africa Energy based on a long-term oil price of USD 70/bbl. The well will be drilled up-dip from the A-J1 discovery, which reduces risk compared to most exploration wells in frontier areas. Another positive is that also a fairly small discovery can be commercial (threshold around 50 mill bbl) due to a benign operating environment and favorable fiscal terms.

Production Right application by Sept’22 & Gas sales agreement approaching 
Operator Total is progressing the development of the large gas discoveries (>1bn boe) on Black 11B/12B (10% WI). The Phase 1 development will benefit from existing infrastructure and supply existing customers in the Mossel Bay area. This is expected to enable first gas already in 2025 with a production of 50-55,000 boe/day (35-40% liquids) gross. We estimate a project IRR of 25-30% based on a capex assumption of USD 2-3bn and a gas price of USD 6/mmbtu, which implies significant upside if commodity prices remain at current levels (contract will likely have an oil price link). The next step is submission of the Production Right application that we expect will occur by the latest in early Sept’22 and be a positive trigger for Africa Energy. Ahead of this, the partners also aim to secure a gas sales agreement that if realized will materially derisk the project. While difficult to forecast the timing of this important milestone, increased focus on energy security (domestic production vs imports), environment benefits (replace coal) and current highcommodity prices (make the contracted price look low) all provide incentives to move the project forward for the South African government, in our opinion.

Attractive risk/reward – BUY/TP SEK 4.50 reiterated 
We estimate Africa Energy’s NAV at SEK 5.5/share based on a long-term Brent price of USD 70/bbl and a gas price of USD 6/mcf for the Block 11B/12B development. With the cash balance and existing discoveries valued at SEK 2.7/share (vs current share price SEK 2.05), we find the risk/reward to be attractive ahead of the upcoming catalysts that over the next months have potential to increase the value of its key asset and add another discovery to Africa Energy’s portfolio. While Total is exactly the type of company preferred to operate the Block 11B/12B development, the near-term drawback is limited news flow as majors typically only report progress upon major milestones. This have impacted Africa Energy’s share price over the last year (down 8% measured in USD) and create an attractive opportunity to buy in ahead of the news flow ahead. We reiterate our TP of SEK 4.50 and see upside potential to above SEK 7.0/share if the Gazania-1 exploration well is a success (SEK 0.5/share downside to our NAV if unsuccessful). Africa Energy is financed for the upcoming catalysts with limited near-term spending but will upon progress at the Block 11B/12B development require external capital in 2023/24, in our estimates. The key risks to our positive view are unsuccessful exploration activities and delays in the development of Block 11B/12B.

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