Hmm, my comments keep disappearing, so I'm not sure if anybody can read them, or maybe I just replied 3 times :)
But thanks for your article. Really liked it. The value case is clear.
Only aspect I think I can add to it is this.
While Prime was paying those large dividends to owners, it was also reducing net debt very quickly during 2021-2022. Last year Prime's net debt was more stable, because they were doing a drilling program. This will support Prime's production volumes for next years. When the drilling problem is done, I think Prime can reduce the last bit of debt again, or/and pay larger dividends.
My point being, maybe backwards looking prime dividends is actually Uderstating the forward income to Africa oil, because it doesn't have to keep the pace of debt reductions ongoing.
Good writeup. I also hold share but here some negative points, since we all tend to cover positives well (as does AOI):
Learning from Europe, Africa states might play nice and only after big Capex is spend introduce those taxes, fees, levies, whatever you want to call it. Risk is there.
Prime NPV number to be used with grain of salt: to use 10% as discount rate (it was?) seems too favourable to me, further volumes (p.a.) might decline earlier.
AOI management might be better now, but still holds ample cash, which derisks their job etc (if prime were to blow up tmr we shareholders would lose a lot, but AOI management salary would be safe no?). Further, if there would be great African mna opportunities, ie majors divestsling them cheaply because (ESG (now not so relevant anymore?)) reasons they should (be able to) finance with debt, IMO.
Good points. Equinor is divesting their Nigerian oil business. That is one of the acquisitions that is possible for Africa oil. The management has talked about it.
Will link to this post in my "Emerging Market Links + The Week Ahead (February 5, 2024)" to be published in a few hours. I have seen other write-ups about the stock + the Namibia find has gotten coverage in the South African etc press...
My concern with any Western listed or based oil stock is always with political and NOT the sort you are thinking of in Africa etc but with Western Govt pressure concerning climate change, ESG, WEF agendas etc... You can find cheap oil stocks in emerging markets e.g. Brazil for example (as long as Lula is largely blocked from implementing WEF etc agendas), who can get oil out of the ground literally for a few dollars a barrel and w/o the sort of political risk western oil companies now have...
I appreciate sharing. I think the west is still the better jurisdiction by a decent margin, but new risks have emerged in the west that you mentioned. Private oil companies will always have a target placed on them important is to try to figure out the specific jurisdiction and then see whether it is accounted for in the valuation. Like I have an oil investment in Thailand $vle.to the government has 50% tax on profits+royalties, but it's still a buy imo because this is more than accounted for in the valuation.
On viewing the net debt in prime: it is not the same how to view it (or rather handle it in valuation). A simple example is a holdco with a bunch of (listed) assets. If all the (nonrecourse) gross debt is at asset level, the holdco benefits sort of from high(er) volatility on asset level. Less so if debt is at holdco level, IMO.
Here it might be a negligible factor, since (npv of) Cashflows in prime's case should be well above prime's debt level
Very nice article, thanks for the great overview. I agree with all of your points.
Regarding the Impact valuation, I think the calculation makes sense but is very sensitive to any rounding of the percent interest. For example, the difference of 0.2% might in reality be anywhere from 0.16% to 0.24% if Africa Oil rounded to the nearest decimal place for their news release. Plugging these values into the valuation calculation gives a wide range:
0.16% -> $1278m
0.2% -> $1022m
0.24% -> $852m
Furthermore, if both the starting and ending percent interest numbers were rounded from two to one decimal places, the maximum difference may be even wider: 31.14% - 30.85% = 0.29%
An alternative calculation involves using some details from Impact's news release dated March 27 2023 in which they state: "Each existing shareholder (as per the company register at 5.00pm on 22 March 2023) is entitled to 5 Open Offer Shares for every 39 Existing Ordinary Shares held".
The proportion between old and new shares can be used to calculate the valuation as follows:
Value Per Share = $95m / 5 shares = $19m / share
Total Valuation = Total Shares * Value Per Share = (39 + 5) * $19m = $836m
Africa Oil's Ownership = $836 * 0.311 = $260m
In the above calculation, I pretend that there are only 44 shares total but the math holds regardless of the actual number of shares because all that matters is the ratio of new shares to old shares. What are your thoughts on this alternative method? I think it makes sense but am not 100% confident.
Because of what you mentioned about the decimal place this seems like be a better way. I just wanted a number in the article tbh. I don't think it's very relevant what can we decipher from almost a year old open offer with no outside money allowed making it a less of an accurate valuation, because if outside money was allowed it would have been a higher valuation.
But thanks for your comment. I think this is probably a better way to look at it.
Hmm, my comments keep disappearing, so I'm not sure if anybody can read them, or maybe I just replied 3 times :)
But thanks for your article. Really liked it. The value case is clear.
Only aspect I think I can add to it is this.
While Prime was paying those large dividends to owners, it was also reducing net debt very quickly during 2021-2022. Last year Prime's net debt was more stable, because they were doing a drilling program. This will support Prime's production volumes for next years. When the drilling problem is done, I think Prime can reduce the last bit of debt again, or/and pay larger dividends.
My point being, maybe backwards looking prime dividends is actually Uderstating the forward income to Africa oil, because it doesn't have to keep the pace of debt reductions ongoing.
Good point. And I do see your 3 comments ;) but from my perspective the more comments the better
Good writeup. I also hold share but here some negative points, since we all tend to cover positives well (as does AOI):
Learning from Europe, Africa states might play nice and only after big Capex is spend introduce those taxes, fees, levies, whatever you want to call it. Risk is there.
Prime NPV number to be used with grain of salt: to use 10% as discount rate (it was?) seems too favourable to me, further volumes (p.a.) might decline earlier.
AOI management might be better now, but still holds ample cash, which derisks their job etc (if prime were to blow up tmr we shareholders would lose a lot, but AOI management salary would be safe no?). Further, if there would be great African mna opportunities, ie majors divestsling them cheaply because (ESG (now not so relevant anymore?)) reasons they should (be able to) finance with debt, IMO.
Good points. Equinor is divesting their Nigerian oil business. That is one of the acquisitions that is possible for Africa oil. The management has talked about it.
Will link to this post in my "Emerging Market Links + The Week Ahead (February 5, 2024)" to be published in a few hours. I have seen other write-ups about the stock + the Namibia find has gotten coverage in the South African etc press...
My concern with any Western listed or based oil stock is always with political and NOT the sort you are thinking of in Africa etc but with Western Govt pressure concerning climate change, ESG, WEF agendas etc... You can find cheap oil stocks in emerging markets e.g. Brazil for example (as long as Lula is largely blocked from implementing WEF etc agendas), who can get oil out of the ground literally for a few dollars a barrel and w/o the sort of political risk western oil companies now have...
I appreciate sharing. I think the west is still the better jurisdiction by a decent margin, but new risks have emerged in the west that you mentioned. Private oil companies will always have a target placed on them important is to try to figure out the specific jurisdiction and then see whether it is accounted for in the valuation. Like I have an oil investment in Thailand $vle.to the government has 50% tax on profits+royalties, but it's still a buy imo because this is more than accounted for in the valuation.
On viewing the net debt in prime: it is not the same how to view it (or rather handle it in valuation). A simple example is a holdco with a bunch of (listed) assets. If all the (nonrecourse) gross debt is at asset level, the holdco benefits sort of from high(er) volatility on asset level. Less so if debt is at holdco level, IMO.
Here it might be a negligible factor, since (npv of) Cashflows in prime's case should be well above prime's debt level
Excellent work, thank you!
Very nice article, thanks for the great overview. I agree with all of your points.
Regarding the Impact valuation, I think the calculation makes sense but is very sensitive to any rounding of the percent interest. For example, the difference of 0.2% might in reality be anywhere from 0.16% to 0.24% if Africa Oil rounded to the nearest decimal place for their news release. Plugging these values into the valuation calculation gives a wide range:
0.16% -> $1278m
0.2% -> $1022m
0.24% -> $852m
Furthermore, if both the starting and ending percent interest numbers were rounded from two to one decimal places, the maximum difference may be even wider: 31.14% - 30.85% = 0.29%
An alternative calculation involves using some details from Impact's news release dated March 27 2023 in which they state: "Each existing shareholder (as per the company register at 5.00pm on 22 March 2023) is entitled to 5 Open Offer Shares for every 39 Existing Ordinary Shares held".
The proportion between old and new shares can be used to calculate the valuation as follows:
Value Per Share = $95m / 5 shares = $19m / share
Total Valuation = Total Shares * Value Per Share = (39 + 5) * $19m = $836m
Africa Oil's Ownership = $836 * 0.311 = $260m
In the above calculation, I pretend that there are only 44 shares total but the math holds regardless of the actual number of shares because all that matters is the ratio of new shares to old shares. What are your thoughts on this alternative method? I think it makes sense but am not 100% confident.
Because of what you mentioned about the decimal place this seems like be a better way. I just wanted a number in the article tbh. I don't think it's very relevant what can we decipher from almost a year old open offer with no outside money allowed making it a less of an accurate valuation, because if outside money was allowed it would have been a higher valuation.
But thanks for your comment. I think this is probably a better way to look at it.
Thanks! very interesing article!
Thanks,
Very good article.