Africa Oil Company Is A Downturn Alternative (TSX:AOI:CA)

Africa Oil Company (OTCPK:AOIFF) is a $900 million USD firm that has been punished as oil costs have declined. That latest weak spot presents a novel alternative for buyers trying to get in on the bottom ground of the corporate’s spectacular portfolio of property and its capacity to drive future shareholder returns.

Africa Oil Company Efficiency

Africa Oil Company has changed into a full-fledged exploration and manufacturing firm, highlighting its strength.

The corporate is totally debt free and its major firm money steadiness is sort of $210 million. Even counting Prime Oil and Fuel’ web debt of $165 million attributable to the corporate, the corporate nonetheless has a web money place of virtually $45 million. That is an unbelievable efficiency from various greater than $1 billion initially of the acquisition.

The corporate has a LTM Web debt / EBITDAX of 0.3x, a low and manageable quantity. The corporate had earned $250 million in money from Prime YTD versus $200 million within the final 2-years. We anticipate continued money flows supported by Prime Oil and Fuel’ hedging program. The corporate has an nearly 3% dividend and it is purchased again shares.

It is slowed down share repurchases just lately, so we would prefer to see that pick-up. The corporate has continued to have substantial exploration success so we would like that to carry out properly as properly.

Africa Oil Company Nigeria

In Nigeria, the corporate has continued to carry out properly.

The corporate is invested in a number of the largest Nigerian oil fields with extremely skilled operators. The corporate has sturdy confirmed reserves, and for the final 2 years it is managed a RRR >100% which is crucial to long-term operations. The corporate has extremely low lifting prices of $8 / barrel, which is able to help huge money move.

The corporate is planning to drill 9 extra manufacturing wells and a pair of new exploration wells, which is able to assist the corporate get manufacturing again up. The corporate is continuous to partially hedge manufacturing produced from these wells. Total, we anticipate the corporate to make use of its asset portfolio to generate huge shareholder returns.

Africa Oil Company Financials

Financially, Africa Oil Company stays extremely sturdy total.

One extremely necessary factor to notice is that Prime Oil and Fuel has considerably improved its personal balance sheet because the acquisition. Because the acquisition, Prime Oil and Fuel’ web debt has been diminished by greater than $450 million and the money steadiness has improved by nearly $85 million. That’s $530 million that went to Prime Oil and Fuel over Africa Oil Corp in <3 years.

Nonetheless, now that Prime Oil and Fuel has $165 million in web remaining debt, we anticipate inside the subsequent yr, it will be in direction of web zero enabling all that money to go in direction of Africa Oil Company as an alternative. That’ll allow far more substantial shareholder returns.

Africa Oil Company Catalysts

Africa Oil Company has various catalysts that may assist help shareholder returns.

Africa Oil Company has various catalysts that we anticipate to seem inside the subsequent yr. The corporate’s Venus and Gazania wells each have the power to signify new developments. On the similar time, the corporate is searching for probably worthwhile farmouts of present property with a view to assist speed up improvement.

Lastly, the corporate is wanting on the potential of latest acquisitions and the renewal of Nigerian property and manufacturing with refinancing and new exploration. All of that collectively may also help help continued money move and development for the corporate.

Our View

Africa Oil Company has the power to generate substantial shareholder returns.

The corporate’s core Prime Oil and Fuel property are persevering with to switch reserves, generate sturdy manufacturing, and supply money move. Enhancements within the firm’s financials will return to the holding firm. The corporate will be capable of make the most of this money for quite a lot of shareholder returns, highlighting its power.

Going ahead, we anticipate the corporate to generate huge returns in relation to its $900 million market capitalization, whereas persevering with to have development alternatives throughout the board, making it a worthwhile funding.

Thesis Danger

The most important threat to the thesis in our view is crude oil costs. The corporate has continued to execute extremely properly, nevertheless, with Brent crude costs at lower than $80 / barrel, the corporate’s earnings will drop. The decrease costs drop, and so they have a historical past of dropping, the extra we anticipate the corporate to wrestle to generate shareholder returns.

Conclusion

Africa Oil Company’s latest share worth drop, is, in our view, an overreaction to the decline in oil costs. The corporate has a robust hedging program in place to attenuate draw back, and the advance of Prime Oil and Fuel’ monetary place means the power to extend future dividends out in direction of shareholders.

Africa Oil Corp. has an affordable dividend and has been aggressively repurchasing shares. We would prefer to see it decide that up, particularly within the present lower cost atmosphere, though it appears to have slowed down. Total, we anticipate Africa Oil Corp. to generate substantial shareholder returns, making it a worthwhile funding.