East African Oil

Africa Oil is a Canadian oil and gas company comprising extensive assets in Kenya, Ethiopia and Somalia as well as a management with a successful track record of transforming oil and gas drilling fields into disposal assets. Africa Oil is listed on the Toronto Stock Exchange and Stockholm’s First North Exchange. Africa Oil is trading at around CAD$7.15 today, with a 52 week range of 3.34 to 11.35 and a market capitalization of CAD$1.65billion. Since last year, the share price has risen 97%. What is driving speculation in a company that has not yet actually turned a profit?

It is the prospect that Africa Oil, if they are able to fully exploit their oil and gas reserves in Kenya, Ethiopia and the Puntland of Somalia, could reap benefits in the multibillions of dollars. Africa’s Atlantic coast is similar in geology to that of offshore Brazil where below a two kilometer layer of deep salt sits roughly 50 billion barrels of oil. This is the opportunity that Africa Oil could exploit at a time when there is pressure on global oil reserve replacement. Following the parallel with Brazil, where companies such as Petrobras were transformed by their oil and gas discoveries, Africa Oil could be following a similar trajectory if successful. Recently, Italy’s largest oil company, Eni, found gas off the coast of Mozambique that was 50% larger than anticipated. Similarly, Heritage Oil discovered exploitable assets in Uganda’s Lake Albert which they sold for US$1.45 billion to Tullow Oil in 2012 and which Tullow Oil then sold stakes in to China’s Cnooc and France’s Total for US$2.9 billion.

Africa Oil have first mover advantage in East Africa as it has reserves of around 300 square kilometres gross with around 23,000 billion barrels of oil gross in prospective oil resources in Kenya and Ethiopia with an AOI working interest in these reserves averaging around 50%. Africa Oil’s gross acreage is equivalent to around 1,200 North Sea blocks. East African oil and gas reserves are at the crossroads for infrastructure build-up from Kenya, Uganda, South Sudan, and Ethiopia. Speculation in Africa Oil is also driven by the fact that once they generate profitable assets, they may be a potential acquisition target for one of the oil majors.

Whilst West Africa has been exploited, East Africa is still relatively untouched and this plays to Africa Oil’s advantage; there are approximately 14,000 wells in West Africa but only 500 in the East. Yet this presents large costs for Africa Oil too as there is little seismic data and knowledge about geology to help them with exploration. It is therefore a good thing that Africa Oil is backed by the Lundin family – who made their name being the first to exploit Qatar’s oil and gas resources nearly 70 years ago and who have a track record of successfully exploring and disposing of mining, oil and gas assets all over the Middle-East and Africa.  

African sunrise or sunset for AOI?

Africa Oil has a 45% shareholding in Horn Petroleum Corporation, another Canadian oil and gas exploration company with a sole focus on the Puntland in Somalia. It currently operates two concessions, in Dharoor Valley and Nugaal Valley, with total gross acreage of around 35,000 square kilometres. These two concessions are in the least explored area of Africa, although in the late 1980s and early 1990s Amoco, Chevron, Agip and Conoco had started exploring this area until civil unrest precipitated their pullout of the country. Therefore, this is an excellent asset for Africa Oil. Furthermore, despite the volatility in the region, sub-Saharan oil and gas fiscal regimes have proven remarkably stable.

The management also has a track record of successfully exploring oil and gas assets and turning them into profitable ventures. CEO Keith Hill, COO Nick Walker, and CFO Ian Gibbs all held the same positions at Valkyries Petroleum which was sold for US$700 million to Lundin Petroleum as well as Tanganyika Oil which was the subject of a US$2 billion takeover bid by Sinopec. 

As the adage goes, when seeking a successful business investment, bet on the people (management). Here we have a great management as well as great potential assets.