ON Sunday, Spare bank published the following note on Africa Energy:
Africa Energy – Total’s 11B/12B negotiations with slow progress, market discount a delay
Total, the operator of block 11B/12B in South Africa where Africa Energy holds a 10% stake, has over the past quarters negotiated with electricity producers Eskom (fully owned by the South African Government) for an offtake agreement. However, negotiations have been slow and Total has indicated other solutions may be evaluated. Africa Intelligence recently wrote there are “Two other options on the table” and that “If negotiations do not work out with either of them, TotalEnergies still plans to participate in a FLNG facility in South African waters and focus on exporting gas abroad”. As far as we interpret the situation, an LNG export solution is more likely now than before (but probably not base case). One year later first gas from 11B/12B cuts our SOTP valuation by SEK ~0.40/share.
Summary of SpareBank research dated 30/3/23
Africa Energy (Buy, tp SEK 3.0) – Market discounts delay for 11B/12B and only USD 1.2/boe fair value
- Q4 financials roughly as expected: Africa Energy reported Q4 22 recurring net income of
USD -1.1m, slightly better than our forecast of USD -1.5m. Net cash of USD 1.8m was below
our forecast of USD 3.2m, mainly driven by increased payables. Overall, Q4 financials were
roughly as expected in our view. - Some funding needed soon: While the company’s cash burn at low activity level is minimal, we see some funding requirement over the next few quarters (if not assets are divested). We note that the company has established a USD 5m credit facility with its three largest shareholders: Africa Oil, Deepkloof Limited and the Lundin Group. The maturity date of this facility is January 31, 2024 and accrue interest at a 10% annual interest rate if repaid by October 31, 2023 or 15% annual interest rate if repaid after October 31, 2023.
- Total’s 11B/12B negotiations with slow progress, market discount a delay: Total, the operator of block 11B/12B in South Africa where Africa Energy holds a 10% stake, has over the past quarters negotiated with electricity producers Eskom (fully owned by the South African
Government) for an offtake agreement. However, negotiations have been slow and Total has indicated other solutions may be evaluated. Africa Intelligence recently wrote there are “Two other options on the table” and that “If negotiations do not work out with either of them,
TotalEnergies still plans to participate in a FLNG facility in South African waters and focus on exporting gas abroad”. As far as we interpret the situation, an LNG export solution is more likely now than before (but probably not base case). One year later first gas from 11B/12B cuts our
SOTP valuation by SEK ~0.40/share. Our full SOTP valuation stands at SEK 6.3/share while our core NAV is SEK 3.3/share. Since the announcement of the dry Gazania well, which is unrelatrf to the 11B/12B development, the share price is down SEK 0.5, which implies that market over the past few months implicitly has assumed 1.2 years delay for 11B/12B compared to the implied assumption as of late 2022. At the current share price (SEK 1.2/share) the marked values 11B/12B discovered wounded at USD 1.5/boe vs. our assessment of USD 4.3/boe. That assessment assumes zero net cash and no value assigned to other assets. We rate African Energy Buy with a SEK 3/share target price. Our target price corresponds to P/NAV of ~0.6x
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