Summary of Pareto note from Friday:
|Imminent positive news|
|We expect operator Total to deliver the application for Production Right on Block 11B/12B shortly. |
This will be an important milestone for the development of the large resources, which with the fast-track development concept have potential to provide South Africa with much needed natural gas from 2026-27 onwards. In addition, the much-anticipated Gazania-1 well targeting >300 mmboe of unrisked resources will start drilling later this month with results expected in October. If successful, we think this can double Africa Energy’s share price while its existing discoveries provide support for the current valuation. BUY/TP SEK 4.5 reiterated
Application for Production Right on block 11B/12B by 6 September
We expect operator Total to deliver an application for Production Right on Block 11B/12B (10% WI) offshore South Africa by the latest 6 September. This will officially take the project into the development stage and be a positive milestone. The partners have already stated the ambition of fast tracking the Phase 1 development by utilizing existing infrastructure, which also reduces costs and enables first gas by 2026-27. Importantly, there is existing demand in South Africa for the gas volumes implying that there should be limited third party risk related to build out of new infrastructure. The timing of the gas sales agreement is uncertain and will be the next significant milestone following the Production Right application.
Exploration drilling at Gazania-1 to commence in late September Another key event near-term is the drilling of the Gazania-1 exploration well (27.5% WI) offshore South Africa, which is carried by the partners (zero costs to Africa Energy). The well is expected to spud in late September with results 25-30 days thereafter. The well will test two prospects and target a total of >300 mill boe of gross unrisked resources, but also smaller discoveries are expected to be commercial (threshold around 50 mill boe) due to a favorable operating conditions and fiscal terms. We estimate an unrisked value potential of SEK 2.5-3.0/share based on our long-term oil price assumptions of USD 70/bbl.
BUY reiterated & Target Price SEK 4.50
We estimate Africa Energy’s NAV at SEK 5.7/share at USD 70/bbl Brent long term and a gas price of USD 6/MMbtu. Of this, existing discoveries and cash is valued at SEK 2.8/share.
This implies a low valuation of the additional derisked potential at Block 11B/12B and the upcoming Gazania-1 exploration well, and/or a significant discount on the Phase 1 development that should narrow as the project progress. The company had USD 7.2m of cash at the end of Q2 and have had a low burn rate of USD 1.8m/quarter in H1’22. This implies that Africa Energy is financed well into 2023, providing time to deliver on the abovementioned milestones, and that a potential funding need should be limited (funding for 1 year equals less than 2% of the market cap).
In addition, we highlight Africa Energy as an increasingly attractive acquisition target given the vastly improved attractiveness of gas resources over the last year. BUY/TP SEK 4.5 reiterated.
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