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 [1] . 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 [2] .
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 [3] .
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 [4] , 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 [5] 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 [6] .
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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 [7] . 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 [8] 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 [9] . 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 [7] 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!
[2] Company website, 'About us': http://www.afren.com/about_afren/
[3] Growth Company Investor, 15 April 2009: http://www.growthcompany.co.uk/news/1018032/afren-plans-83m-placing.thtml
[4] Interim presentation, p28: http://www.afren.com/download.axd?id=652
[5] Interim presentation, p8: http://www.afren.com/download.axd?id=652
[6] Interim presentation, p11: http://www.afren.com/download.axd?id=652
[7] 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
[8] Edison Investment Research, 29 September 2009: http://www.edisoninvestmentresearch.co.uk/research/category/afren
[9] Forbes, 4 November 2009: http://www.forbes.com/feeds/afx/2009/11/04/afx7082993.html
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Afren plc (Afren) is engaged in oil and gas exploration, development and production in Africa and the Kurdistan region of Iraq. It operates in five geographical markets: Nigeria, Cote d’Ivoire, Other West Africa, Eastern Africa and Middle East and North Africa. It has a portfolio of 29 assets in 12 countries. During the year ended December 31, 2011, Afren and its partner Amni International Petroleum Development Company Limited (Amni) completed two infill wells, Okoro-11 and Okoro-12. As of December 31, 2011, it had operated one appraisal well and drilled nine production wells in partnership with Amni. During 2011, it had produced 19,154 barrels of oil equivalent per day. In May 2013, Afren Plc raised its interest to 54.8% from 44.4 % by acquiring a 10.4% stake in First Hydrocarbon Nigeria Co Ltd. more »
6 Comments on this Article show/hide all
Sounds nice doesn't it? Lots of big production numbers...
But irritatingly Afren only ever quote gross production, not net. As the operator, on one level this can be justified. And cost recovery complicates things. Nevertheless, it is still pretty misleading for potential shareholders who don't realise that half of the production will be going to someone else once costs are recovered.
You also don't mention the high degree of scepticism in the industry that Ebok has anywhere near the amount of recoverable oil that Afren think it has - discussed on this thread: http://www.stockopedia.co.uk/forum/view/26529/afren-first-thread?comment=49#49 The Nov 3 RNS went some way to countering this, but I don't think you can discount it totally.
There are also the very odd dealings with Gasol.
I've made a fair bit from them last year and have a small position now. But I wouldn't suggest that anyone puts a large part of their investment pot into this.
db
In reply to doverbeach (post #1)
Hi Dover
It's actually the norm in the industry to report gross levels of production for fields. Afren have all the info out there so you can work out net as do all other operators. I'm afraid you're accusing the whole industry of being misleading. In terms of their productcion for next year that will be pretty much their production as that amount of oil will be attributable to them. At a later date when costs are paid off for Ebok it will reduce, although there is a significant chance they will find more. It's all there in black and white for any potential shareholder.
I haven't seen any scepticism in the industry re recoverable reserves. I've seen unsubstantiated postings on various web sites by people such as yourself but if you can find any actual factual scepticism from named experts I'd honestly love to see it.
I haven't seen any odd dealings with Gasol. They own a minority share of a company which is targeting LNG projects in the Gulf of Guinea and is working on the Zafiro project. What are the odd dealings, again I'd honestly love to know of any factual irregularities?
There seem to be a lot of insinuations in your posting but no facts.
regards
fd
In reply to fraserdean (post #2)
Hi fraserdean and welcome to Stockopedia.
There seem to be a lot of insinuations in your posting but no facts. [fraserdean]
I'm sorry to say that your apparent challenges to doverbeach's integrity are misguided and unfounded.
This post (http://www.stockopedia.co.uk/comment/view/33128/re-afren-first-thread) highlights the doubts raised, not by hot-headed bulletin-board posters, but the guys on FT's on Alphaville.
"Afren have all the info out there so you can work out net as do all other operators." [fraserdean]
On a basic point, Directors are running a company on behalf of shareholders and should be providing them with transparent information - they shouldn't be leaving shareholders lots of homework to do to arrive at basic information such as production levels or recoverable reserves.
You might also like to have a quick look at this post (http://www.stockopedia.co.uk/comment/view/30480/re-oil-eps-technical-discussion-thread) - although I should perhaps disclose that I wrote it.
SW10
Hi
Thanks SW10, nice to be here.
I think if anything you proved my point. As far as I'm aware FT Alphaville aren't experts in the oil industry. I'm talking about analysts consultants etc. people who spend there time looking at the industry. I haven't seen a single report doubting the reserves figures and I've seen a lot of reports on Afren with not one of them negative.
I'd be delighted if you could point me in the direction of one. I'm sure FT Alphaville are useful in some ways but their job is different.
You're absolutely right, directors are running on behalf of the shareholders and I think if you go to the Afren web site and have a look at the presentations you'll find all the reserves figures are stated very clearly. But regardless, investors must surely have some basic responsiblity for doing research themselves.
Anyway, that's enough on the topic for me.
regards
fd
investors must surely have some basic responsibility for doing research themselves
I don't disagree. But companies also have a responsibility to present the whole picture. The fact is that most E&P companies mention in RNSs somewhere, even if it only in the details not the headlines, what %s they own of the assets being discussed. And I have personally met PIs at Afren AGMs who had no idea what I was talking about when I pointed out that Afren did not own 100% of some assets :(
re the odd dealings with Gasol. I should have been more specific. am not suggesting that Afren have acted improperly. But I consider Gasol have acting in highly dubious fashion in the past (see http://boards.fool.co.uk/Message.asp?mid=11079278&sort=whole) and I view the Afren/ Gasol relationship as being to cosy to be for the benefit of Afren shareholders.
db
Good posts on both sides of the argument! :-).......albeit that I don't think the "insinuations" comment was helpful!
I'm not a fan of Afren, though this has more to do with the political risk profile than anything specific to the company. Accordingly I haven't looked into the exact way that numbers are presented.....
....however, if I might make some general observations:
We all (here) know the difference between gross and net reserves, working interests and entitlements, oil in place and recoverable 2P reserves, P10 reserves estimates and P50 etc etc. However, that is often only when we actually pause to think about the exact situation!! .......
....and that is the nub of the point re presentation!
Some years ago now, the press got over-excited about Cairn's reserves numbers (which were OOIP) and failed to take on board the recoverables figures that the company had indicated (somewhat sotto voce) and pushed Cairn's shares well ahead of fundamentals. I commented on this at the time here http://boards.fool.co.uk/Message.asp?mid=8766838&sort=postdate . A few months later, the shares fell some 40% when the market suddenly realised the extent of its over-optimism.
......so investors (and analysts!) should always be careful to ensure that they understand the meaning and implications of the numbers they are presented with!
Some companies habitually talk about oil in place figures instead of giving estimates of recoverables. Others habitually give potential P10 figures for both OOIP and estimated recoverables. And others prefer to talk about gross reserves and production from a field, rather than advertising their actual entitlements, net of any royalties or minorities.
From an investor standpoint this surely means "caveat emptor" and "DYOR"....rather than relying on second-hand estimates from journalists, analysts or other investors. And, from a company viewpoint, I would argue that companies should try to present a clear and honest assessment of their assets (both producing and potential).
It is NOT acceptable for companies to allow investors to believe that P10 numbers are really P50, or that OOIP is really recoverable etc etc.....so it is incumbent on them to make this as clear as possible so that investors can form their own rational view.
But neither is it acceptable for investors to demand figures presented in the way that they personally would prefer, when they could perfectly easily make adjustments or informed guesses using standard industry norms. Companies presenting information have many different constituencies to which they present their numbers - and their preferences are frequently different. For example, analysts (I am told) prefer to be given working interest numbers and then arrive at entitlements by making their own adjustments.......whereas most ordinary investors probably prefer entitlements figures - and thus go straight to a number that more closely links to the value of the company.
In sum, there is a need for care by both companies and their investors (and anyone intermediating the communication process) - and it is reasonable to expect companies to be attempting to present a clear and honest view of the situation! Companies which (rightly or wrongly!!) are considered to be less than candid with their investors will acquire a bad reputation with investors - and may thus trade "cheaper than they ought to".......though recent events elsewhere in the sector make it clear that even with reputational doubts, it is still possible for companies to make meaningful oil discoveries! ;-)
ee