Afren is focused on oil and gas in West Africa, where it has producing assets as well as an extensive exploration and development portfolio. It's an interesting company, and this is a fascinating time for it, since it's about to grow massively as a producer, having produced first oil in 2008. Management now plans to increase production from 22,000 boepd last year - when only the Okoro Setu field was producing - to 65,000 boepd by the end of 2010  . It's also focused on monetising gas production, which has transformed the economics for producing from some of the gas-rich West African fields.
Afren claims unrisked prospective resources of 585 mmboe net, and 2P proved oil reserves of 163 bn barrels, with the vast majority of its oil (77%) and gas (81%) resource in Nigeria, where it has interests in the Ebok and Okwok offshore fields. The company is also involved in exploratory drilling in Cote d'Ivoire, Gabon, Ghana and Angola, and produces in Cote d'Ivoire  .
The Nigerian Okoro Setu field (2 fields really) is Afren's first development. It's a shallow water (46 feet) offshore field, 12 km from the coast. 7 wells have now been brought onstream. Development was remarkably quick - the first agreement was signed with AMNI in first quarter of 2006, Q4 2006 saw appraisal drilling, and the field came into production in Q2 08.
The Ebok field, Nigeria, should shortly come onstream and is expected to more than double production. An independent assessment of Ebok by Netherland, Sewell & Associates confirmed a preliminary estimate of 148 million barrels of oil, with recoverable reserves of 41.2 million barrels.
Ebok could produce at a rate of 15,000 to 25,000 barrels a day by early 2010, and that could increase to as much as 50,000 barrels a day by the beginning of 2011. That would allow Afren to produce up to 65,000 barrels a day in total by that date, with Ebok the main contributor  .
The Okwok field is close to Ebok, and the reservoir appears to be continuous between the two. Full appraisal will be carried out by Q3 2010. In August 2009, Afren announced that it had entered a joint venture with Addax to develop the field; Afren will retain a 28% interest. Afren will fund one appraisal well, to be spudded in Q3 next year, and thereafter Afren and Addax will split development funding 70-30, to be recovered from their proportionate revenue shares. Okwok is estimated (by Afren) to have a 70 mmbbls recoverable resources, and has further potential at the lower, Qua Iboe level, where two 200 mmbls prospects have been identified by seismic. Okwok is relatively low risk, since it was discovered as early as 1967, by ExxonMobil, though it was not produced at the time.
Afren is also producing on the CI-11 block, offshore Cote d'Ivoire, which has reserves and resources of some 116 mmbls, both oil and gas. It's producing at the rate of over 8,000 boepd, up on last year's 7,000. The company believes there's upside potential here  , as the field has up-dip extensions of deepwater features similar to those in the adjacent Jubilee field, Ghana - this will be firmed up with infill drilling in early 2010.
Interims for the period to June 2009 reflect production from Okoro, Nigeria and Cl-11 in Ivory Coast; revenues were USD 155m, against zero this time last year. Though the company made a gross profit of USD 20.5m, it hasn't yet broken through to operating profitability - the EBIT loss was USD 15.2m.
What's particularly good news for investors is that the company has managed to exceed its prior production guidance in both Nigeria and Cote d'Ivoire; for instance it's producing 19,327 bopd gross at Okoro when management had only expected 15,000. While that may be down to management setting low targets (earlier estimates were for a 15-20,000 range), rather than a stunning operating performance, it's definitely the right way round. Given the relatively fast development of Okoro, I wouldn't mind betting management runs a pretty tight ship, though.
The company also has a strong balance sheet, with USD 153m in the bank at the interim stage  and total debt of USD 194.9m. Further financing has been agreed for the development of Okwok. Capex in the first half was some USD 45m - that will increase to USD 103m in the second half, out of which the vast majority will be spent on the Ebok appraisal  .
So we have here a company that aims to grow its production capability fast, and is planning to almost quadruple it by the end of 2012., when management is targeting production of 100,000 bopd  . That's from current projects, not from acquiring new prospects or production. Afren is expected to make its first profit this year, and should see profits ramp up decidedly in 2010.
But there's quite a lot more to it than just production - this isn't a BP or Shell style producer where it has to run hard to stand still in terms of resource. Instead, Afren has a number of interesting exploration and appraisal prospects across West Africa which will be targeted in the next year and a half. In Congo, it's drilling the La Noumbi prospect, targeting 40 mmbbls; the area is highly prospective, and La Noumbi is next to the world class, producing M'Boundi field, and on trend with it. It's also targeting the Keta block in Ghana. Its exploration portfolio as a whole contains 585 mmbbl unrisked net mean resources and gives the company substantial organic growth potential.
Earlier this year Afren raised capital to fund its Nigerian expansion, and has just raised more through a placing. It also has substantial room to use farm-ins for development of individual prospects. It's a good story - but is it all in the share price?
According to Edison  the stock trades at par with its peers but deserves a premium. Edison makes some good arguments for this - for instance it points out Afren's strong political connections have allowed it to acquire oil resources at discounted prices. (In Ivory Coast it's paid USD 7 a barrel against a West African average of USD 12., though since these assets were acquired from Devon Energy, that might not really be Afren's doing.) But I wonder whether that might be chasing the share price too high.
That's looking at the company on a resources and DCF basis though. I'm tempted, instead, to look at it on a PER basis, since it will be making a profit this year and next. This year's PER, unfortunately, is just silly - something like 250x, since the company is still only marginally profitable. On the other hand the 2010 multiple looks like 6-7 x. Now there's not, I think, a huge amount of risk in there - there's some execution risk getting Ebok into production, but progress so far appears to be good and management's track record suggests it knows exactly what it's doing. I would say, for a company that is expected to grow and that has exploration upside as well, that is really incredibly cheap. £BP and Royal Dutch Shell B trade on higher multiples than that, for Pete's sake!
Nomura has a 110p target on the stock, raised from 97p, and rates the stock as a buy  . That doesn't seem to leave much room for outperformance though - but I rather like stocks where the brokers' valuation is within 10-15% of the share price, on the basis that this is likely to be a more realistic valuation than the 'it's worth three times the share price' that you often find attached to penny stocks (which of course Afren isn't).
There will certainly be newsflow coming along within the next six months that could lead to further appreciation of the oil price. First oil at Ebok, appraisal results at Okwok, results of drilling at La Noumbi, are all to come in the fairly near term - though of course there's a bit of risk if the appraisal and drilling results aren't as good as hoped. (But with a 6x PER, how much risk is there?)
I might be tempted to add a chunk of it to my ISA. But hang on a moment; this is an AIM stock, so I can't. Yet. But it's moving up to the main market  and will probably join the FTSE 250 when it does - so I only have to wait till December. If only the share price will wait for me!
 Company website, 'About us': http://www.afren.com/about_afren/
 Growth Company Investor, 15 April 2009: http://www.growthcompany.co.uk/news/1018032/afren-plans-83m-placing.thtml
 Interim presentation, p28: http://www.afren.com/download.axd?id=652
 Interim presentation, p8: http://www.afren.com/download.axd?id=652
 Interim presentation, p11: http://www.afren.com/download.axd?id=652
 Investors Chronicle, 11 November 2009: http://www.investorschronicle.co.uk/Companies/ByEvent/Risk/Analysis/article/20091111/ee4b7a5e-ceb6-11de-9040-00144f2af8e8/Afren-joins-the-Aim-graduates.jsp
 Edison Investment Research, 29 September 2009: http://www.edisoninvestmentresearch.co.uk/research/category/afren
 Forbes, 4 November 2009: http://www.forbes.com/feeds/afx/2009/11/04/afx7082993.html