Fearnley Securities on Africa Energy – “92% upside to Price Target”

Fearnley Securities published an update on Africa Energy. Very bullish report. I enclose below my summary of their main points from the 18 page long research:

From E To E&P In Global Hotspot
Entering development in South Africa at Block 11B/12B and Block 2B. Drilling of Gazania-1 a major short-term trigger. A discovery could fast track development at Block 2B.
  “A new world-class gas and oil play” is what TotalEnergies (TTE) named the Brulpadda discovery in 2019. Then, a year later TTE discovered the even larger Luiperd. Both discoveries are in Paddavissie Fairway at the massive Block 11B/12B (19,000 km2) offshore South Africa. AEC has an indirect 10% WI in Block 11B/12B, that are moving into development (Production Right filed) under the attractive South African tax law. AEC will stay in for development that in full could bring a NPV of USD 300-400m (Phase I and II). Furthermore, Gazania-1 is currently being drilled at Block 2B, the same basin as TTE`s 1.4bnboe Venus discovery. We argue a Gazania project could bring a NPV of USD 484-806m, vs. the MCap of USD 327m. We estimate NAV of USD 868m (Unrisked 1,687m), and raise our TP to SEK 5.0/sh (SEK 4.5/sh, 09.03.2021) based on AEC`s promising development opportunities in South Africa. Buy reiterated with 92% upside to TP.  

Short-term triggers ahead
A major trigger is the disclosure of commercial gas terms (host government sole offtaker) for the Luiperd EPS project that we conservatively estimate to USD 40/boe. As South Africa is currently 90% powered by coal, the Luiperd project is also a play opener for a South African gas market. Another major trigger is the results of Gazania-1 drilling that is expected mid-November. A discovery in line with our expectations (gross 349 mmboe) would serve as catalyst for the share price. Though we believe AEC will stay in for development at both Block 2B and 11B/12B, potential exits are possible to finance further exploration or development at AEC`s “preferred” block. We see a partial farm-out at Block 2B as most likely, as the field partners need a more mature operator with a track record.  

Valuation – Buy TP SEK 5/sh
Our NAV-based valuation at 10% WACC derives our TP of SEK 5/sh. We base the valuation on three developments in South Africa at Blocks 2B & 11B/12B. The un-risked value potential under our base case reserve estimate (net 405mmboe WI) comes out at SEK 9.7 /sh, though we stress that positive revisions to these estimates hold the potential to lift that figure meaningfully higher.

Other Recent Investments:

We have entered back into Xbrane today in the capital increase transaction. We have also subscribed to the new shares of Biovica. I wrote here several times on these opportunities, see previous blog posts for details.

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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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