An Eight-Bagger In Three Years

Published in Company Comment on 27 March 2012

Profits tripled in 2011 for this African oil company -- will 2012 deliver?

As I wrote yesterday, East African oil and gas is hot property at the moment.

Yesterday saw shares in Bowleven (LSE: BLVN) rise by 20% following an upgrade to the company's Cameroon reserves, and the success of FTSE 250 oil explorer Afren (LSE: AFR) provides further proof of the huge potential of this region's untapped resources.

Eight-bagger

Three years ago, Afren's share price was languishing below 15p. Since then it has skyrocketed and is currently hovering around 130p -- an eight-bagger!

Afren's previous pre-2009 highs were highly speculative, but today's share price is supported by growing, profitable production assets, making the company a much safer investment than it was when it floated in 2005.

Profits up 172%

Afren's post-tax profits rose by 172% from $46m to $125m in 2011, thanks to an 87% increase in turnover from $319m to $597m.

The rise in profit was also helped by higher oil prices; Afren's average realised oil price per barrel rose by 37% from $79.7 in 2010 to $109 in 2011. Despite this boost, it's reassuring to see that the company can be profitable at lower oil prices.

Net debt rose from $128m to $548m, thanks to two bond issues, increasing leverage from 15% to 45%. However, this is not excessive and 75% of Afren's debt is long-dated (2016-19).

Afren also has $292m of cash on hand.

Production

Afren is ramping up production in its Nigerian oil fields and is on course to reach 42,000–46,000 boepd (barrels of oil equivalent per day) in 2012. Longer term, Afren believes production will reach 100,000 boepd by 2017.

Using production revenues to fund ongoing exploration and growth is a popular strategy that can deliver stability and prevent excessive stock dilution for smaller oil companies.

At least two of the companies I have written about recently -- Genel Energy (LSE: GENL) and Trap Oil Group (LSE: TRAP) -- are taking the same approach. Ex-BP (LSE: BP) boss Tony Hayward has built Genel's business model around this strategy, which I find very attractive in an oil share.

Discoveries

Afren has already made one substantial find this year in its Okoro East field, an offshoot of its main Okoro field, where production is already underway.

A number of further wells are planned for 2012, providing plenty of potential for further gains.

Buying into Afren

Afren offers a balance of speculative risk and solid underpinnings. The company's net reserves increased by 132% to 185 mboe (185 million barrels of oil equivalent) in 2011, and this year should see a substantial increase in production revenues.

There is also the possibility of a takeover -- a possibility that has been given more substance by rumours that privately-owned Svenska Petroleum, which operates in the same region, could be up for sale.

The sale of a regional competitor would have the effect of placing a concrete value on Afren's assets and could encourage a bid -- with shareholders the most likely beneficiaries.

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