Africa Oil Corporation—Activist Opportunity And Takeover Target

Leaded Lode

Jan 31, 2022

Africa Oil Corporation—Activist Opportunity And Takeover Target

by Talmage Adams

About:

Africa Oil Corporation [TSX: AOI]

Mentions:

Africa Energy Corporation [NASDAQ Stockholm: AEC]

Eco (Atlantic) Plc [TSX-V: EOG]

Summary

Cash cow with low-cost (<$15/bbl breakeven) PDP reserves and a strong balance sheet (0.5 Net Debt/EBITDAX).

Trading at ~2-2.5x FCF and 0.5 EV/NAV10 for PDP assets alone, excluding numerous exploration assets.

Aggressive stock buybacks, if implemented, will result in material enhancement of long-term shareholder value.

Weak corporate governance and poor capital allocation leave opportunity to unlock value.

Lack of controlling shareholder and board voting support make for an activist target and an M&A candidate.

Oil Platform at Sunset — mantaphoto/iStock via Getty Images

Africa Oil Corporation

Africa Oil Corporation (“Africa Oil”, “AOC”, “the Company”, or “the Firm”) is incorporated under the laws of British Columbia, Canada. It is listed on the TSX and NASDAQ Stockholm under the ticker symbol AOI, and on the US OTC market under the symbol AOIFF. Its functional currency is the US dollar.

The Company has high-quality assets, a strong balance sheet, and a valuation significantly cheaper than peers in an undervalued sector. Its African jurisdiction risk is widely overestimated. With a low break-even of ~$15/bbl including opex, capex, and royalties, and low leverage of ~0.5x Net Debt/EBITDAX, AOC is insulated from the cyclicality of commodity price fluctuations. Yet, in spite of its defensive characteristics, it remains both relatively undervalued, trading at a discount to riskier peers with more marginal assets and higher leverage, as well as absolutely undervalued, in a sector currently exhibiting rich equity premia, valued at an unparallelled 0.5x EV/GAV10 (unlevered P/NAV10).

**Africa Oil Corporation [AOI]: Stock Chart**Yahoo Finance

Company Overview

[Amounts USD, except per-share data]:

Share Price, 28 January 2022: CAD 2.02

Market capitalisation: $750 million

Parent net cash, estimated as of 31 December 2021: $60 million

Assets

50% joint venture interest in Prime Oil & Gas Cooperatief U.A. (private)
31% of Impact Oil & Gas (private)
20% direct interest plus 11% indirect interest (total 31% interest) in Africa Energy Ltd. (listed)
20% interest in Eco (Atlantic) Plc (listed)
25% interest in Blocks 10BB and 13T in Kenya

Prime Oil & Gas Cooperatief U.A. (“Prime”)

Africa Oil's most valuable asset is its 50% interest in Prime, a Dutch privateco jointly held by BTG E&P B.V., which is, in turn, 80% held by BTG Pactual Holding S.A. and 20% by Helios Investment Partners LLP (“Helios”), the latter of which is also AOC's largest shareholder, at 14%. Prime holds non-operated minority interest in three developed producing, low-opex ($6/bbl), low-capex ($7/bbl) giant deepwater fields offshore Nigeria, through two licences, Chevron-operated OML127 and Total-operated OML130.

Since Africa Oil's acquisition, 2 years ago, in January 2020, of its 50% interest in associate Prime, it has received $400 million in dividends up to the parent, despite Prime being hedged at oil prices around $60, significantly lower than current spot or futures curve. The dividends were used to completely degear AOC's balance sheet, while Prime also paid down debt to a low level of $250 million net to AOC's 50% shareholding.

As of the December 2020 reserve report, AOC's 2P reserves within Prime, at 50% basis, were as follows:

77 MMbbl light and medium oil and 52 Bcf gas (7-year reserve life index)

After-tax NPV10: $1,356 million at $55/bbl
Oil price assumption: $55/bbl

Prime's Financials are as follows, estimated as of December 2021, at 50% basis:

$500 million debt
More than $250 million cash

As of 15 November 2021, pro-forma the subsequent $50 million dividend paid by Prime to each of AOC and BTG E&P S.A., Africa Oil's consolidated enterprise value is roughly:

Market Cap 750M – Cash 60M + Prime Net Debt 250M = $940 million, and will likely be somewhat less at year-end due to the increase in cash after Prime's sales expected through the balance of Q4.

High Quality Assets

Apart from the Company's low leverage, the main attraction of Africa Oil, relative to peers, is its low operational risk profile. Its subsidiary Prime's production has had the majority of capex already sunk. Its PDP production has an industry-leading unlevered all-in break-even as follows:

Opex: $6/bbl
Capex: $7/bbl
Royalties: $2/bbl at <$20/bbl oil prices

Total (unlevered) operating break-even: $15/bbl

Africa Oil is a cash cow.

Petroleum Investment Act

In July 2021, Nigeria passed the Petroleum Industry Act, with new royalties, but lower corporate income tax for deepwater fields. It will have a neutral to positive impact on NAV. Details, as applicable to Deepwater petroleum production, are as follows:

The old tax code had:

0% royalty rate
50% corporate tax rate

The new tax code has:

a sliding scale royalty regime — <$20/bbl, 10%; $20-60/bbl, 12.5%; $60-100/bbl, 14%; $100-150/bbl, 18%; >$150/bbl, 20%
30% corporate tax rate

Until the Prime's PSA licences are renewed, the old tax code remains in force. Upon renewal, the new tax code will take effect. Licences have the following expiries:

OML 127 — December 2024

OML 130 — February 2025

Each licence may be renewed early, depending on administrative and political considerations.

Benefits (NAV positive) of renewal are as follows:

Lower state take at all oil prices below $150/bbl
Ability to refinance reserve-based lending credit facility ("RBL") which pulls forwards FCFE

Drawbacks (NAV negative) of renewal are as follows:

Licence renewal fee, 2-3% of NAV, pulled forward

Early licence renewal, if and when possible, will be beneficial

Production

Oil sales at Prime, net to AOC's 50% interest, were 19.1 million barrels in 2020. Production in 2021, as yet unreported, but gathered from the Nigerian government website, were 17.8 million barrels. [See below link.]

https://www.nuprc.gov.ng/oil-production-status-report/

Thus, declines have been modest, only 7%, year-over-year, despite only $15.3 million in capex spend in the 9 months ended 2021 ($9.7 million—9 months ended 2020). Management has guided for higher capex in 2022, and has indicated on a recent conference call that net production will likely be sustained at current levels of over 30mboe/d for the next 5 years.

Hedges

As of the third quarter financial statement filing date of 15 November 2021, Prime had “hedged or sold forward all of its allocated 2021 cargos at an average dated brent price of $62/bbl and six of its cargos in 2022 at an average dated brent price of $69/bbl.” The latter would comprise roughly 4 months of production, until April 2022.

Cash Flow Model

I have prepared a simple model of Prime's cash flows, net to Africa Oil's 50% shareholding. Assumptions are as follows:

$80 Brent oil price, per average of 2-year forward strip
$6/bbl opex, per recent performance
$7/bbl capex, per reserve report's 5-year forecast
9mmbbl/annum production 2022-2026
10% decline rate through 2027-2031
$237 million asset retirement obligation, per reserve report
Immediate repayment of RBL net debt*
Mid-year discounting

*This is a conservative assumption, because discounted FCFE will increase with amortisation schedule or deferred amortisation following RBL refinancing.

Africa Oil's Enterprise Value is:

Market Cap 750M - Parent Cash 60M + Prime Net Debt 250M = $940 million

I have prepared two cases of the model; one with the old tax code, and one with the new PIA. In what follows, GAV=Gross Asset Value=NAV+Net Debt. EV/GAV10 is the ratio of consolidated enterprise value to the net present value of after-tax FCFF. It is the equivalent of an unlevered P/NAV10, which is a conservative metric controlling for the effect of leverage.

Old Tax Code:

Year 1 FCFF of $300 million
After Tax NAV10: $1,490 million
After Tax GAV10: $1,740 million
IRR to market value of equity: 29.5%
P/NAV10: 0.50
Consolidated EV/GAV10: 0.54

New Tax Code (PIA):

Year 1 FCFF of $350 million
After Tax GAV: $1,785 million
After Tax GAV: $2,035 million
IRR to market value of equity: 36.8%
P/NAV10: 0.42
Consolidated EV/GAV10: 0.46

The reality is somewhere between the two cases, because the Old Tax Code model will transition to the PIA upon licence renewal. These estimates are roughly in line with the result of an alternate approach of adjusting AOC's 2020 reserve report for one year of depletion, accretion of the discount, and $80/bbl oil.

Key takeaways are that, counting only its interest in Prime, Africa Oil:

AOC trades at half of unlevered NAV10.
At current market value imputes a 30% internal rate of return; i.e., a 30% cost of equity

This is extraordinary value at low risk.

The above reckoning gives zero value to:

the Company's securities portfolio, worth more roughly $100 million (of which 75% is directly- and 25% indirectly held) whose intrinsic value is arguably higher.
the Company's other private exploration and development assets.

These are discussed below.

Other Assets

Africa Oil holds a suite of exploration and development assets, as follows.

Africa Energy Corporation [NASDAQ Stockholm: AEC]: 10% interest in Block 11B/12B, one of the largest undeveloped oil and gas discoveries globally. Operator Total says it has reached the threshold of commercialisation, and is negotiating with the Republic of South Africa on fiscal terms (gas offtake). Africa Oil holds ~31% of Africa Energy directly and indirectly through privateco Impact Oil and Gas Ltd. Market value is $80 million. This implies $1/boe based on preliminary analyst resource estimates. This is likely a small fraction of net present value.
Kenya: Study of South Lokichar project by Tullow Oil Plc indicates $577 million NPV10 at $54 oil (2022, escalated), net to AOC's 25% interest.
Impact Oil and Gas Ltd: Venus well offshore Namibia spud by Total SA. Results pending. Africa Oil holds ~31% of Impact.
Eco (Atlantic) Plc [TSX-V: EOG]: Deepwater exploration offshore Guyana. Africa Oil holds ~20%. Market value $15 million.

Cheap

At $80/bbl Brent, roughly the average of the two-year forward strip for Brent, Africa Oil trades at EV/GAV10 of ~0.5 and parent EV/FCF of ~2-2.5, with leverage of only ~0.5x EV/EBITDAX. Given this remarkably low valuation, including only proved and probable, mostly developed, producing assets at Prime, as well as low sensitivity to the oil price, the short duration of Prime's cash flows, and surplus assets (including marketable securities) mean that optimal capital allocation should result in a high IRR (cost of equity) of ~30%. Stock buybacks will increase returns.

Cheap for a Reason: Negative Economic Value Added

Some finance theory: Africa Oil's PDP reserves alone impute a cost of equity in the vicinity of 30% +/- 5%. This is the Internal Rate of Return (“IRR”) noted in the above discussion of AOC's interest in Prime's PDP reserves. This is the return which could be earned by owning the producing assets, simply putting them into runoff, and collecting dividends until reserves deplete. The cost of equity is the hurdle rate for investment opportunities. Economic Value Added (“EVA”)* is the profit generated on the basis of the market cap, by investments in excess of that required by the cost of equity, and Market Value Added (“MVA”)* is the after-tax net present value of investments, discounted at a rate equal to the cost of equity. If an investment opportunity offers an IRR exceeding the cost of equity, the project generates a positive EVA and has positive MVA, and creates value for shareholders. If its IRR falls short of the firm's cost of equity, the project generates a negative EVA and has negative MVA, and destroys value.

This is a simple concept, but one which is not well understood by most investors and most public company officers and directors. In simple terms, if Africa Oil cannot reinvest its profits at a 30% annual return, then it should pay dividends or buy back stock. Buybacks are strongly preferred because they are highly tax-efficient for shareholders, for two reasons:

Buybacks allow shareholder to decide when to take their dividend by selling shares to create a synthetic dividend, and thereby have the option of deferring tax indefinitely
Buybacks effectively convert dividends into capital gains, which are taxed at a lower rate in many jurisdictions.

In fact, because the risk profile of buybacks, which effectively reinvests into existing known PDP reserves, is lower than other investments such as M&A, and certainly exploration and development, the return required by such other investments is even higher than 30%. Such investments are hard to come by in a competitive industry such as oil and gas. Given how high AOC's cost of equity is (i.e., how cheap its stock is) continued investments in exploration constitute Economic Value Subtracted. Africa Oil has $60 million in cash, nearly 10% of market cap. The Company should commence immediately buying back stock.

*Astute readers will note that this is not the classical definition, but that book value, rather than market value, is the basis for measuring economic profit. I have redefined these terms in order to create a more meaningful way of measuring whether management is allocating capital correctly. The fact that market cap of $750 million is below book value of $892 million indicates that value has been destroyed (negative market value added) but how much is due to past management action and how much to cyclical industry factors is a more complex matter.

Eco (Atlantic) Plc.

Africa Oil has made numerous investments in Eco (Atlantic) Plc. [TSX-V:EOG], which is primarily engaged in exploring for oil offshore Guyana. AOC currently owns 18% of EOG.

On 12 August 2019, EOG reported:

“Eco (Atlantic) Oil & Gas Ltd. (AIM: ECO, TSX-V: EOG), today announces a significant oil discovery on the Orinduik Block, offshore Guyana. The Jethro-1 exploration well was drilled by the Stena Forth drillship to a final depth of 14,331 feet (4,400 meters) in approximately 1,350 meters of water. Evaluation of logging data confirms that the Jethro-1 is the first Discovery on the Orinduik licence and comprises high quality oil bearing sandstone reservoir of Lower Tertiary age. It encountered 180.5 feet (55 meters) of net high-quality oil pay in excellent lower Tertiary sandstone reservoirs which supports recoverable oil resources. The well has been cased, and is now awaiting further evaluation to determine the appropriate appraisal activity.”

**Eco (Atlantic) Plc [EOG]: Stock Chart**Yahoo Finance

EOG shares ran like a scalded cat, from $1.14 to $2.75 within about a month, concurrent with a second announcement on 16 September 2019:

“Eco (Atlantic) Oil & Gas Ltd. (AIM: ECO, TSX-V: EOG) today announces a second oil discovery on the Orinduik Block, offshore Guyana. The Joe-1 exploration well was drilled by the Stena Forth drillship to a final depth of 7,176 feet (2,175 meters) in approximately 2,546 feet (780 meters) of water. Evaluation of MWD, wireline logging and sampling of the oil confirms that Joe-1 is the second discovery on the Orinduik license and comprises high quality oil-bearing sandstone reservoir with a high porosity of Upper Tertiary age. It encountered 52 feet (16 meters) of continuous thick sandstone which further proves the presence of recoverable oil resources. Additional thinner sands above and below the main pay are being evaluated for possible incremental pay.”

Subsequently, in a press release dated 13 November 2019, EOG reported:

“Fluid samples were taken in both of the wells and were sent for analysis by the Operator. The complete fluid analysis has not yet been received however, initial results suggest that the samples recovered to date from Jethro-1 and Joe-1 are mobile heavy crudes, not dissimilar to the commercial heavy crudes in the North Sea, Gulf of Mexico, the Campos Basin in Brazil, Venezuela and Angola, with high sulphur content.”

Thus there was a dramatic rally on exploration results which were framed as positive, only to be retraced upon a much later disclosure that the “significant oil discovery” was in fact heavy sour oil, of limited commercial value.

On 28 June 2021, EOG announced:

“Eco (Atlantic) Oil & Gas Ltd. (AIM: ECO, TSX‐V: EOG), an oil and gas exploration company with licences in the proven oil province of Guyana and the highly prospective basins of Namibia, is pleased to announce, further to its announcement earlier today, that it has completed, subject to TSX Venture Exchange approval, a private placement with strategic partner Africa Oil Corp. ("Africa Oil") and Charlestown Energy Partners LLC ("Charlestown Energy"), a Private Equity firm based in New York, USA, to raise approximately 6.1m CAD (the "Subscription").

Africa Oil has subscribed for 5,945,913 new common shares in Eco at a price of 0.41 CAD per new common share (the "Subscription Price") and will be granted the same number of warrants to acquire common shares at the Subscription Price with a two-year duration. Charlestown Energy has also subscribed for 9,000,000 new common shares at the Subscription Price and will be issued the same number of warrants on equivalent terms. The Subscription by Africa Oil and Charlestown Energy will result in Africa Oil increasing its interest in Eco to 19.99%, and Charlestown Energy increasing its interest to 4.51%, of the issued share capital of Eco as enlarged by the Subscription, in each case before any exercise of warrants.”

On the same day, 28 June 2021, EOG reported:

“Eco (Atlantic) Oil & Gas Ltd. (AIM: ECO, TSX‐V: EOG), an oil and gas exploration company with licences in the proven oil province of Guyana and the highly prospective basins of Namibia, is pleased to announce it has closed a transaction with JHI Associates Inc. ("JHI"), a private company incorporated in Ontario and headquartered in Toronto, Canada, for Eco to acquire up to a 10% interest in JHI (the "Transaction") and to appoint Keith Hill, a non-executive Director of Eco, to the JHI Board. The Transaction provides Eco with immediate exposure to a current active drilling program in the Canje Block offshore Guyana. The Canje Block is operated by ExxonMobil and is held by Working Interests partners Esso Exploration & Production Guyana Limited (35%), with Total E&P Guyana B.V. (35%), JHI Associates (BVI) Inc. (17.5%) and Mid-Atlantic Oil & Gas Inc. (12.5%).

Only one week later, on 05 July 2021, EOG reported that the well came up dry.

“Eco (Atlantic) Oil & Gas Ltd. (AIM: ECO, TSX‐V: EOG), the oil and gas exploration company with licences in the proven oil province of Guyana and the highly prospective basins of Namibia, has received a detailed update from JHI Associates Inc. ("JHI"). The Jabillo-1 well in the Canje Block, offshore Guyana, reached its planned target depth and was evaluated but did not show evidence of commercial hydrocarbons. Jabillo-1 will now be plugged and abandoned.”

Subsequently, on 01 November 2021, EOG disclosed another duster:

“Eco received, on Saturday 30 October, a detailed update from JHI Associates Inc. that ExxonMobil has successfully and safely drilled the Sapote-1 well on the Canje Block, to a depth of 6,759 meters (22,172 ft), in 2,549 meters (8,362 ft) of water. The well recorded hydrocarbon shows while drilling, and in the logging sequence, in a deeper interval than anticipated, but had no shows in the upper primary objective horizon. With sidewall coring and wireline logging complete, ExxonMobil will now work to define the reservoir properties, including porosity and permeability, and the cored samples will be analysed for hydrocarbons.”

To summarise the situation:

Africa Oil investee EOG has selectively reported exploration results, in a way that appears to have misled investors.
Africa Oil has continued to fund EOG, as recently as June 2021, in its risky exploration ventures, while Africa Oil management claims it cannot afford dividends or buybacks, because the Company is delevering.
Africa Oil effectively financed EOG's acquisition of an interest in privateco JHI, which had an indirect interest in the Canje Block. Thus AOC funded exploration through two intermediaries, one of which private, with little disclosure about its assets or activities.
EOG bought two wells, both of which came up dry, and the first of which was reported dry only one week after the initial investment.
Regardless of the negative exploration result, the effective interest of EOG in Canje was 6.4% of 17.5%, or 1.12% of the block, which was purchased for $10 million, at a nearly $1 billion valuation, for essentially one well, the first already drilled.
Current Africa Oil CEO Keith Hill sits on the board of AOC, EOG, and JHI; i.e, at all three levels of this indirect investment. He also earned total compensation from EOG of CAD 371,921 in 2020 and CAD 389,817 in 2019. This is a significant conflict of interest with obligations as CEO and director of Africa Oil.

Shareholder Return Programme

In conference calls in 2021 management made numerous non-specific promises of capital returns; i.e., dividends and buybacks. On 15 November 2021, an Africa Oil news release reported:

“Africa Oil President and CEO Keith Hill commented: “Third quarter 2021 was a very strong period for us with the receipt of two significant Prime dividends. These have resulted in substantial deleveraging and I am delighted that Africa Oil is now in a positive net cash position. We have access to significant liquidity, including $62 million of undrawn credit facility, cash on hand, our 50% share of Prime’s cash balance and operating cash flows from Prime. Therefore, I am confident that we can deliver on two strategic goals; the acquisition of accretive producing assets and implementing shareholder capital return programs. The Africa Oil team is working hard on both fronts and in relation to shareholder returns, we are finalizing the management plans that will be considered by the board of directors in December. I expect to update the markets once we have the board approved plan by end of this year.”

Subsequently, on 15 December 2021, AOC Chairman John Craig stated:

“Our notable 2021 achievement is the deleveraging of our balance sheet that was the priority goal for the Board. This was accompanied by an attractive refinancing of Africa Oil's corporate loan that saw a substantial reduction in our cost of borrowing and an enhanced maturity profile. I am delighted that we are ahead of our plan to reduce debt, having reached a debt-free corporate balance sheet ahead of expectations. This provides us with the flexibility to expand and accelerate our capital allocation plans in a disciplined manner. We must strike the right balance between maintaining an appropriate cash buffer, stable balance sheet and allocating capital for shareholder returns and acquisitions.

The Board have discussed shareholder capital return options and are supportive of implementing the selected program in the new year. The details are being finalised and will be communicated to you with the company's full-year results in February 2022, subject to obtaining the external approvals.”

Thus, after several vague promises, and an apparent commitment to shareholders in November for capital return by year-end, dividends and buybacks were delayed by another two months until February 2022, still with no concrete details of amounts, timing, or the form of the return, whether dividends or buybacks.

Block 2B, Offshore South Africa

On 10 January 2022 EOG announced:

“Eco (Atlantic) Oil & Gas Ltd. (AIM: ECO, TSX ‐ V: EOG), the oil and gas exploration company focused on the offshore Atlantic Margins, announces today that it has signed a Memorandum of Understanding ("MOU") to acquire 100% of Azinam Group Limited ("Azinam") (the "Acquisition"), including Azinam's entire offshore asset portfolio, in return for a 16.65% equity stake in the enlarged Group on completion of the Acquisition.

…

Discussions are already underway with Eco's key existing stakeholders in relation to underwriting the funds required to participate directly in the 2022 Block 2B South Africa drilling programme.”

Such transaction has not yet been announced, but it appears likely that Africa Oil management intends to fund the planned Gazania-1 exploration well which farming-in Azinam chose not to drill.

Capital Misallocation: Economic Value Subtracted

Africa Oil management has promised capital return, dividends and/or buybacks. (Buybacks are superior for tax reasons.) The foregoing indicates a revealed preference. They have not made good on their promises. Meanwhile, AOC management persists with investments in high-risk deepwater wildcat exploration drilling, and continues to threaten acquisitions. This is a major reason AOC's valuation is depressed: the Firm is worth more dead than alive.

The simple fact is that there is no investment opportunity available to Africa Oil today, nor is there likely to be in the future, in either exploration or M&A, which is anywhere near as accretive to shareholder value as share repurchases. Stock buybacks are by far the most attractive investment available to the Company, on an absolute basis, and especially on a risk-adjusted basis. Parent Africa Oil has more than $60 million of cash, nearly 10% of its market cap, and no debt, plus cash continuing to pour in via dividends from 50% JV subsidiary Prime, which itself is modestly geared. Share repurchases are the highest and best use of Africa Oil's cash and cash flow. The board should immediately authorise a Normal Course Issuer Bid (“NCIB”), and can self-tender through a Substantial Issuer Bid ("SIB") once NCIB limits are reached. This will be accretive to long-term shareholder value.

Africa Oil is incorporated under the laws of British Columbia, Canada. A 5% shareholder ($37.5 million) can call a special meeting and hold an election of directors. If the officers and directors are unwilling to do the right thing and allocate capital correctly, an activist or an acquirer may do it for them. Value would be enhanced by monetising non-core assets, buying back stock, implementing levered buybacks, and/or putting the Company in play.

Liquidity

Average volume is about 2 million shares per day, including both TSX and NASDAQ Stockholm.

Africa Oil has no controlling shareholder.

As of the last proxy date of 26 March 2021, Helios Investment Partners LLP holds, through Stampede Natural Resources S.a.r.l., held 66,569,922 shares, or approximately 14% of the equity. AOC has no other 10% shareholder.

Insiders are poorly aligned with shareholders

As of the last proxy filing on 30 March 2021, current directors and officers held the following numbers of common shares:

Keith C. Hill, CEO: 1,669,288

Pascal Nicodeme, CFO: 48,582 (as of today)

Ian Gibbs: 1,082,695

Andrew D. Bartlett: 525,836

John H. Craig: 363,424

John S. Guidry: 307,800

Erin Johnston: Nil

Kimberly Wood: Nil

A corporate director's duty is to represent shareholders. How can a director represent shareholders without holding any shares?

The Company is often promoted as a “Lundin company” associated with the Lundin family. Although the Lundin family trusts participated in placements in AOC in the past, they have not filed as 10% shareholders, and have no apparent shareholding, unless they are associated with Helios. Six of seven directors have interlocking directorates, past and present, with other Lundin companies. The only truly independent director is Kimberly Wood, one of the two directors who holds zero shares.

There has been virtually zero insider buying in the history of the Company.

The board has little voting support

On 20 April 2021, Africa Oil announced the results of its election of directors at the Company's AGM. Of a total of 473 million shares outstanding, approximately 132 million shares (28%) were voted to elect each nominated director. As of today, institutional and insider shareholders were as follows:

Helios: 67 million shares

Other: 48 million shares

Insiders: 4 million shares

_______________________

Total: 139 million shares

Other consists mostly of Fidelity and a few other institutions, the majority of which appear to be ETFs, index funds, or mutual funds running passive strategies.

Therefore, it appears that apart from the one major shareholder, Company insiders, and passive institutional shareholders (who typically vote in favour by a formula if certain technical conditions are met) virtually zero shareholders have voted in favour of the current board.

Poor Shareholder Alignment

In view of little insider ownership and buying, and the CEO sitting on at least seven different boards, including Africa Oil and four direct or indirect investees of AOC (Impact, Africa Energy, Eco (Atlantic), and JHI), the officers and directors are poorly aligned with shareholders.

Risks and Mitigants

Oil Price. This is mitigated by the industry-leading break-even of $15/bbl.
Financing. This affects exploration and production assets, but Prime needs no further funding, as it generates more than enough cash to pay RBL amortisation. Refinancing will enhance returns, but is not necessary.
Political risk. Africa is perceived as high risk, due to lesser protections of property rights, and corruption. However, Nigeria's petroleum industry has enjoyed a fiscally stable regime. Passage of the PIA gives clarity to fiscal terms. Nigeria needs to be competitive to attract capital to provide much needed development to its rich offshore petroleum resources.
Security. Offshore assets are safer than onshore.
Environmental disaster. This is always a risk of high severity, especially for a predominately single-asset company, albeit one of low probability.
Management and governance. Sub-optimal capital allocation has been discussed as both a risk and an opportunity.

Conclusion

Africa Oil has high-quality assets, a fortress balance sheet, and a profoundly cheap valuation on PDP assets alone, excluding numerous material assets in its exploration and development portfolio. It would be a simple job to dramatically enhance shareholder value by:

Not funding further high-risk exploration and development projects
Monetising or, ideally, tax-efficiently spinning off, non-core assets:
1. Africa Energy Corp: $55 million held directly by AOC
2. Africa Energy Corp: $25 milllion held indirectly by AOC through its 31% interest in Impact Oil & Gas Ltd.
3. Eco (Atlantic) Plc: $15 million held directly by AOC
Returning cash to shareholders via buybacks and/or dividends, preferably buybacks.
Implementing a levered recapitalisation: increase borrowings to shrink the equity
Initiating a strategic review of all corporate assets, and considering possible divestitures and/or business combinations.

If the current officers and directors are unwilling to allocate capital correctly, an attractive opportunity is presented to an activist investor or corporate suitor.

I hold shares in Africa Oil Corporation, and consider the stock an attractive at the current market price.

Disclosure: I/we have a beneficial long position in the shares of AOI/AOIFF either through stock ownership, options, or other derivatives.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.