Africa Oil Corp (TSX:AOI) is a top performer with high-quality producing assets and a strong balance sheet. Equally important, the Canadian oil and gas company is a promising way to play the oil patch as there’s significant upside for investors at the Venus light oil discovery in the Orange Basin, off the coast of Namibia.
Venus was discovered a year ago by TotalEnergies using the drillship Maersk Voyager in Block 2913B, hitting 84 meters of net pay in a high-quality Lower Cretaceous sandstone reservoir that contained light oil and associated gas.
Analysts at Wood Mackenzie have described Venus as the “world's largest oil discovery in 2022.” Reports have theorized that the Orange Basin find could hold recoverable reserves of 10-to-15 billion barrels of oil and trillions of cubic feet of gas.
Africa Oil has an indirect interest in the block through a 30.9% shareholding in its investee company Impact Oil & Gas Limited. Impact holds a 20% working interest in Block 2913B and an 18.89% working interest in the adjacent Block 2912. Paris-based oil and gas major TotalEnergies is the operator of both blocks.
TotalEnergies has now spudded a key appraisal probe offshore Namibia that will go a long way to revealing the actual scale of the potentially colossal Venus oil and gas discovery.
“The Venus oil discovery, offshore Namibia, has opened up a world-class petroleum basin,” Africa Oil CEO Keith Hill told Proactive.
“TotalEnergies CEO Patrick Pouyanné has described it as one of the biggest discoveries in the world with the potential to be one of the biggest ones offshore ever. If you look at TotalEnergies, they're spending half their worldwide exploration budget on appraising the discovery this year. That tells you how important they think it is,” he added.
Hill has worked in the oil industry for 38 years with oil majors such as Occidental Petroleum and Shell Oil Company and has spent the last 25 years with the highly successful Lundin Group.
Drilling in Namibia and Nigeria
TotalEnergies' Pouyanné has referred to Block 2913B as TotalEnergies’ Golden Block and compared it to Block 17, off the Angolan coast which has produced three billion barrels of oil since 2001.
TotalEnergies has launched a four-well program in Namibia, including the re-entry of the Venus-1X discovery well, in Block 2913B, to appraise the Venus discovery and to investigate a potential westerly extension of Venus, the Nara prospect, formerly referred to as West Venus on Block 2912.
Venus-1A, on Block 2913B, is the first well to be drilled, using the Tungsten Explorer drillship, and is the first appraisal well on the Venus discovery. This will be followed by a drill stem test using the Deepsea Mira.
“We should have results on Venus-1A which is being drilled now within the next 60 days. The fact that they stepped out 13 kilometers (km) to the north of the discovery well gives an idea of just how big this field could be,” said Hill.
TotalEnergies will start drilling operations in Block 2912 during mid-2023. Following the drilling of the Venus-1A appraisal well, the Nara-1X exploration will be drilled and flow tested by the Tungsten Explorer and, if successful, an appraisal well, Nara-1A, could then be drilled and flow tested.
Bankable Nigerian assets
Africa Oil closed the acquisition of its 50% shareholding in Prime Oil and Gas Cooperatief UA for $519.5 million in January 2020, and has since received dividends from Prime totaling $650 million.
As a result of the Prime acquisition, Africa Oil’s cash flow generating projects in Nigeria now include Egina, Akpo and the Agbami fields, which are among the top oil producing fields in West Africa.
The Canadian full-cycle upstream oil and gas company holds an 8% interest in Block OML 127 containing the Agbami Field and a 16% interest in OML 130 containing the Akpo Field and the Egina Field. It has a combined gross field production of more than 330,000 barrels of oil equivalent per day (boepd).
Africa Oil's Prime has now kicked off a multi-well infill drilling program on the Egina oil field, offshore Nigeria.
“The Nigeria asset is self-funding. We don't have to plow more money into it. In fact, it could return money to us every year,” said Hill.
Africa Oil’s production this year will come solely from its 50% shareholding in Prime. The 2023 management guidance includes a working interest production guidance range of 18,500-21,500 boepd with 82% expected to be light and medium crude oil and 18% conventional natural gas.
Based on Prime's 2023 forward sales program, the management expects Prime to generate cash from operations of $250-to-$330 million net to the company's 50% shareholding, before working capital adjustments.
Eyeing acquisitions
Hill has terrific experience with mergers and acquisitions (M&A) and is adept at figuring out how all the pieces fit together.
“Our primary focus is on our Nigerian and Namibian Orange Basin assets, particularly the Venus discovery. Still, it doesn't preclude us from going out and buying another asset. We’ve got plenty of money for that so it's no secret that we're interested in M&A,” said Hill.
“The only assets we're looking for are producing cash flowing assets. We're not looking to put significant money into exploration although we still have some great exploration projects — we've recently signed two new blocks in Equatorial Guinea to complement our high profile Orange Basin block 3B/4B. We plan to bring in partners to all of these blocks to fund the majority of exploration costs.”
Hill said he believes Africa Oil should be “out buying things now.”
“We like assets that are being divested by majors who want to get out of their non-core properties. There are some good assets coming on the market,” said Hill. “We always have to compare it against returning money to our shareholders. Anything worth buying has to look better than essentially buying back our own shares.”
Africa Oil’s growth blueprint is focused squarely on offshore drilling.
“We like offshore better than onshore,” said Hill.
Typically, onshore drilling is more sensitive to environmental, social, and governance (ESG) values and metrics which can result in higher costs and longer timelines.
Africa Oil had a cash balance of $199.7 million as of December 31, 2022, compared to $58.9 million at the end of 2021.
“Obviously, we will have to put some money in the Venus asset appraisal program, but we have nearly $200 million in the bank, and we also have a $100 million undrawn line of credit,” said Hill.
On the back of a strong debt-free balance sheet and robust cash flows from Nigeria, Africa Oil returned $63.3 million to its shareholders in 2022 through its share buyback program and dividend policy.
“There are no plans to stop that dividend,” said Hill. “The company’s board recently declared its first 2023 semi-annual cash dividend of $0.025 per common share.”
He added: “We have a 10% target of free float for share-buyback, we’ve done about 50% of that already and we plan to do the remaining 50%.”
Allure of playing the oil patch
Oil hit a 14-year high of $120 in the wake of Russia’s invasion of Ukraine and there have been some bullish calls on oil prices. Again, rapid economic and population expansion ensures that we will need all sources of energy in the decades to come including oil.
“What I like about Africa Oil is that the Nigerian asset, our core cash flowing asset, underpins the entire market value of the stock. If nothing else good happens in the company, you've got a very safe investment because Nigeria will continue to produce and put out cash flow. I think that's basically what the market is valuing the stock on now,” said Hill.
“The biggest catalysts coming up this summer, will be drilling those two wells in Venus, which are undoubtedly the best two appraisal and exploration wells that are going to be drilled this year. On top of that, we've got Block 3B/4B in South Africa, the new Equatorial Guinea blocks, Kenya. The downside risk is very slim, but the upside potential is huge.”
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
Follow her on Twitter: @UttaraProactive