Africa Oil: Like I never left
It's worth more
Africa Oil has not been a strong performer this year but based on multiple catalysts all happening during the first half of 2025 and the stock price being depressed by the weak oil price and tax loss selling currently. I see a high chance of a rerating of the stock from the current price during the first half of 2025.
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Last January I wrote this. “The Cheapest Oil Stock I Know” There have been some developments since then and it’s time to provide my updated thoughts.
Maybe some of you who don’t follow me on Twitter didn’t know that I sold out of Africa Oil in September and then recently at a bit higher price bought back in.
So what happened there why did I abandon Africa Oil and then unabandon it?
The primary reason was that I wanted to buy more Valeura Energy. Both stocks were falling because the oil price was going down and I thought why not just get more Valeura? Because Valeura is cheaper than Africa Oil, it has better management, better catalysts, and better everything. And it was a good move as Valeura is up 25% from that buy.
The second reason for my decision to sell Africa Oil was that Africa Oil announced a deal that would double its production. In my opinion, this deal is good for shareholders, but originally it was supposed to close in Q3 2025 and they said they won’t be doing buybacks until this happens. This was my take and the details of the deal.
source: AlmostMongolian, X
I think it’s a good deal, but having to wait until Q3, or maybe before, and the way these situations tend to go when there are regulatory things that need to get done there would be a high chance of further delays. It might not actually close until Q4. Then they said in the Q2 earnings call that they won’t be buying back shares until the deal closes.
Source: SA Premium, Africa Q2 conference call transcript
The buybacks were supporting the Africa Oil stock for the whole year and we saw a drop in the share price after they stopped. However, that was also because of the falling oil price.
So I’m looking at this situation thinking:
“There won’t be a buyback or increased dividend likely until Q3 maybe Q4 next year. The stock will also suffer from tax loss selling before the end of the year. I think this will be dead money for a bit. I’m going to buy something else like Valeura that is also very cheap but has short-term catalysts.”
I was planning to re-enter Africa Oil closer to when the deal closes if it’s still very cheap.
Why did I return to Africa Oil?
First, they announced they now expect the deal to be closed at the end of the first quarter of 2025 and then they re-initiated the buyback.
Source: https://ceo.ca/@newswire/nigerian-regulator-clears-prime-consolidation
Then in the Q3 earnings call, they said they restarted the buyback.
Source: SA premium, Africa Oil Q3 earnings call transcript
This is counter to what they said in the Q2 call. They said they won’t buy back shares until the consolidation is done, but here they say they waited for the Impact farm down to complete until buying back shares, but whatever I like buybacks.
Source: https://ceo.ca/@newswire/africa-oil-announces-results-of-share-buyback-program-7baef
So basically both of the reasons why I sold got rectified. The deal will close sooner and the buybacks re-started. This means I have to be long again. This is why I follow my ex-investments and this situation inspired my article “Follow your ex-investments(link)” I did not mention Africa Oil in that article, because I knew I would make a stand-alone article about Africa Oil.
The stock is already recovering a bit, but I see an easy path back to the 2.5-3.5 CAD price level.
Source: Google
CURRENT SET-UP
Market cap=624m USD
“When we complete the transaction with BTG amalgamation, we are going to issue a fixed number of shares, which have been pretty fine and it's roughly 240 million shares.”
Market cap after the amalgamation=443+240=683m shares at 1,35$ USD is 963m market cap
EV After the consolidation= Prime net debt is 329,4m and Africa oil net cash is 136.1m so EV pro-forma is 922+329,4-136.1=1 156,3m USD
Should I use amalgamation or consolidation? I hate both so much I can’t decide. Send me a YouTube comment about what word I should use.
Source: https://africaoilcorp.com/wp-content/uploads/2024/08/Q224-Presentation__August-2024_FINAL.pdf
It’s already pretty cheap based on this Pro-Forma outlook that uses a 2-year forward curve + $70LT Brent with 2% annual inflation. It’s a pretty conservative price outlook. The current Brent price is 71$ after a big drop recently. So using those price assumptions Africa Oil will be making these FCF amounts. And I’m just eyeballing these numbers from this chart so they are roughly accurate and in USD.
2025=275m FCF
2026=200m FCF
2027=170m FCF
2028=330m FCF Preowei Project production lift.
Post 2029 Venus is expected to start producing, but there is a lot of uncertainty around its size and timing so they don’t make clear predictions anymore.
Their producing fields are declining, but they will be looking to offset this with new developments in Nigeria and Orange Basin.
These fields even though declining are low-cost and will be highly profitable for the foreseeable future.
Using next year’s FCF assuming around 70$ oil price(Brent) Market cap/FCF would be 3,5 and EV/FCF would be 4,2. This is a cheap valuation, but nothing crazy in this sector. It does get much cheaper when you include their exploration assets.
What I like about this deal is that it commits to a 100m base dividend which would be a 10,3% dividend yield at the current valuation.
In addition: “an annual commitment to distribute at least 50 percent. of excess free cash flow after Base Dividend distribution in the form of supplemental dividends and/or share repurchases”
If we add this we would have 275m of FCF 100m base dividend and at least 50% of what is left after it=87,5m would also go towards dividends or buybacks meaning a minimum of 187,5m of shareholder returns compared to 922m market cap meaning a 19,4% shareholders yield.
Shareholders’ yield is like dividend yield but also includes stock buybacks and debt repayments.
These commitments to a base dividend and at least 50% of FCF after the base dividend to shareholder returns are really good. These policies can drive a rerating in the valuation because people can expect reliable income from the stock. I’m not very interested in the dividend itself. I’m more interested in the rerating it could deliver because the stock will be more attractive to dividend investors and institutional investors.
Africa Oil did not have a predictable shareholder returns policy before. They would have a small dividend and do buybacks here and there, but it was not consistent or predictable. This hurt the stock because the stock seemed directionless in the past. The valuation was cheap, but it kind of did everything. It was an exploration and M&A-focused company with random shareholder distributions and many minority shareholdings in other companies.
Now they are taking a clear direction. They are a high dividend payer and consolidating their portfolio to their core assets.
BTG who is the other party in this consolidation will own 35% of the company and will also have board seats and are in a two-year lock-up which is good as we won’t be seeing increased selling pressure from this dilution for a while. They are clearly focused on being paid and were likely the driving force behind the shareholder return commitments.
The shareholder return commitments are also a shield from bad moves by the management because they won’t even have a lot of money to work with to make any new major acquisitions.
This is good because I think they have all they need in their portfolio already for an easy 50-150% rerating of the stock. There does not need to be any additional M&A.
What is going on with their other assets?
What is there in addition to the 10,3% dividend yield and 19,4% shareholders yield?
3B/4B drilling, Large potential expansion of Venus, Eg-18 exploration results
This has been around 60% of the article the 40% left is for paid subs.