Description

Afentra (AET, 39.6p, Market cap: £90mm) Category: E&P

Ongoing energy transition concerns and economies of scale drive oil majors and some NOCs to seek to divest marginal or late-life oil fields to pursue renewables or scale. These top-down board-driven mandates offer an open goal for smaller and more nimble actors with a mission statement of delivering value instead of virtue signalling. Afentra is such a special-purpose vehicle designed to take advantage of this quasi-forced selling behaviour with a specific focus on Africa, which has seen the largest regional peak-to-trough decline in upstream capex at 80%.

Afentra seeks to establish a low-cost basis in acquired assets, thus delivering value through sheer valuation uplift on top of the application of industrial know-how to the acquired subsurface acreage, which may include field development techniques and enhancements such as workovers and infills. This skill is borne of in-house management expertise armed with laudable track records across various energy companies in Africa.

Afentra was created by appropriating Sterling Energy, a shell company with a non-operated position in Somaliland that traded at a chronic discount to its cash on the balance sheet. Incoming CEO Paul McDade, formerly the CEO of Tullow Oil, and Ian Cloke, head of Tullow’s exploration division, organised a group of shareholders to buy two Russian investment companies that held controlling stakes in Sterling, thus creating a cash vehicle with approximately $40m on the balance sheet and primed to explore a value-creating deal within Africa; a jurisdiction very familiar to the two principals.

In October 2021, Afentra originally announced that it competed to acquire a 20% non-operated equity stake in Block 3/05 in Angola and a 40% stake in appraisal Block 23. This process culminated in a signed SPA in April 2022 after which the stock was suspended owing to the scale of the purchase and reverse takeover merger code in the UK. Afentra later announced that it also acquired a further 4% in Block 3/05 from the Croatian NOC, INA, and a 5% stake in Block 3/05A. In July 2023, Afentra tweaked its deal once again to buy a 12% stake from another non-op equity partner, Azule, in Block 3/05 and another 16% stake in Block 3/05A. It also reduced the equity stake it was to buy from Sonangol to render working interests equitable on a pro forma basis.

Presently, the Sonangol portion of the deal has closed and investors await the closing of the Azule portion of the deal. Pro forma for all transactions, Afentra will carry a 30% working interest in Block 3/05 and a 21.3% interest in Block 3/05A. At run-rate production levels, this implies about 6,500-7,000 bopd of production net to Afentra with a free option on further well intervention work to boost recovery. 

Critically, the lock box nature all transactions imply that Afentra’s cost basis in the assets decreases over time as the closing price will be concomitantly reduced by the cash generation delivered during the deal closing processes. In a high commodity price environment, time is Afentra’s friend as deal extensions are a low risk affair and the nuisance value is more than offset through enhanced deal economics. Strong oil prices since the announcement of the deals coupled with a protracted closing process implies that Afentra will be paying a considerable discount to headline prices by virtue of 1) cumulative cash generation to close 2) entitlement barrels that accrue to the buyer, not the vendor. In the case of the Sonangol deal, Afentra effectively reduced its upfront consideration by 60% with the balance reflected in entitlement barrels. Afentra was almost paid to complete the deal. We anticipate the Azule deal will enjoy similarly flattering close adjustments.

Afentra also secured a $75m debt facility with Trafigura to finance both deals as well as a $30m working capital facility to finance asset funding requirements between loadings. In exchange, Trafigura will market the crude noting that their facility is only applicable to assets in the Angolan theatre.

Afentra remains extraordinarily undervalued trading at about 1x 2025 EBITDA incorporating full year EBITDA at strip or a 40% to NAV. This discount may reflect concerns about the Azule deal closure, which is essentially a formality given ministerial assent has been secured and the closing process simply requires some signatures for asset novation.

Catalyst

* Closing of the Azule deal which management has guided to occur in April

* Further value accretive m&a driven by motivated non-economic sellers

* Further progress on work programmes to extend reserve lives on acquired fields