Africa Oil Corp: Lundin Family-backed Shell Company with Projects in Africa

Africa Oil Corp (OTCPK:AOIFF) (AFE:TSX)

Africa Oil is majority owned by the Lundin Family of Sweden. They are parking capital into this shell company until a project is discovered to justify the acquisition.

The Company has projects in South Africa and Namibia next door. These two countries have infrastructure that is the closest to that of the developed world.

The Company’s Strategy

Africa Oil Corp (OTCPK:AOIFF)(AFE:TSX) has a number of drills happening in Puntland, Somalia and Block 10BB in Kenya. I expect the stock to creep up in the lead up to the drilling results which are expected in April 2012.

The management team has been on the board for a while and they have proven themselves at executing projects in East Africa where the company is focused. They also have a good understanding of the political and security risks involved in operating in these countries which is very important.

The company has over $60 million in cash and no debt. This is enough money to fund multiple share buybacks and a base rate dividend payout. I would prefer for management to use the money on share repurchases as they are much more accretive than M&A or new exploration. Besides, buybacks are the best way for this Company to get its cash back in the near term.

The Company’s Risks

With the global oil majors divesting their African interests, independent companies like Africa Oil are stepping up to fill the void. However, it’s important to understand the risks of Africa Oil before investing.

The company has significant cash on hand, trading at half of its unlevered NAV10, with more coming in via dividends from 50% JV subsidiary Prime. LOTM believes that share buybacks are the best use of these funds.

The prosecutors allege that Lundin and Schneiter demanded that Sudan allow for oil operations in areas not controlled by the government or its allied militia, knowing that the military would have to take control of those areas by force. If convicted, the two face life in prison. This accusation is a serious risk for the company’s future. It also has the potential to derail any M&A activity. However, the current management team has proven its ability to navigate such issues in the past. Moreover, the association with the well-known Lundin family organization gives the company access to resources not available to many small companies.

The Company’s Cash Flow

Africa Oil is a development stage company but unlike most others it does not need to raise capital on a regular basis. It is backed by the Lundin Group which owns 11 separate public companies. It reports in US dollars and the family owns a large stake. That means that this management is unlikely to overleverage the company at any point.

The company has a cash flow source in Nigeria and speculative prospects elsewhere. The net debt of its 50% owned associate Prime is less than the company’s cash balance. That makes it possible to “go shopping” for more cash flow deals as needed.

This has the potential to make it much easier for a future owner to extract value from the company. If the current officers and directors are unwilling to allocate capital correctly, an activist or an acquirer may step in and do it for them. That could mean monetising non-core assets, buying back stock or implementing levered buybacks.

The Company’s Ownership

Under the direction of CEO Keith Hill, Canada-based Africa Oil has become one of the most competitive and impactful independent oil companies operating in our continent. In the last two years, it has made a major discovery offshore Namibia with partner TotalEnergies and secured production-sharing contracts in Equatorial Guinea. It also has campaigns in Nigeria, Kenya and South Africa.

Hill has 35 years of experience in the oil industry including international new venture management and senior exploration positions. He earned a bachelor’s degree in geology and master’s degree in geophysics from Michigan State University.

AOC’s ownership structure is complex. It is indirectly controlled by the Lundin family through its interests in Africa Energy (OTCPK:AOIFF) and privateco JHI, as well as directly through its ownership percentage in investee EOG. EOG has selectively reported its exploration results, inflating its valuation, and has been funding high-risk deepwater wildcat drilling at a rate that far exceeds its NPV10 ($/boe). Despite these risks, AOC’s management has promised to return capital to shareholders through dividends and buybacks.

Sprint back to the home screen

Leave a Reply

Your email address will not be published. Required fields are marked *