Farm-out signed with Ophir

African Petroleum Corporation 6 January 2016 Update

African Petroleum Corporation

Farm-out signed with Ophir

Deal

Oil & gas

  6 January 2016  

Price

NOK1.62

Market cap

NOK173m

NOK8.5/US$

Net cash ($m) at 30 September 2015 (excludes $12.6m restricted and $2m equity raise)

0.5

Shares in issue

107m

Free float

51%

Code

APCL

Primary exchange

Oslo Axess

Secondary exchange

Frankfurt open
exchange

Share price performance

52-week high/low

NOK6.57

NOK0.89

Business description

African Petroleum is an Oslo-listed, pure-play explorer with high working interests in 10 offshore licences across five West African countries. The company is in discussions to farm down its blocks to fund drilling in the coming years.

Next events

Further farm-downs

2016

CI-513 well

By end 2017

Analysts

Will Forbes

+44 (0)20 3077 5749

Ian McLelland

+44 (0)20 3077 5756

African Petroleum Corporation is a research client of Edison Investment Research Limited

African Petroleum (APCL) has announced it has entered into a new PSC with Ophir Energy on its CI-513 licence area, Côte d’Ivoire. Ophir will take a 45% interest in return for a US$16.9m contribution towards APCL’s back costs and paying an additional 10% towards drilling costs. Importantly, the PSC has also been renegotiated to reflect the current commodity price environment and outlook for deepwater developments. This has resulted in an extension of the minimum work commitments (a well is now required within two years), adjusted fiscal terms and holding costs. The involvement of a company of Ophir’s size is a vote of confidence in the acreage, which contains Ayame West, a prospect with mean unrisked resources of 800mmstb across a number of horizons.

Year
end

Revenue
($m)

PBT*
($m)

Operating cash
flow ($m)

Capex/
investments ($m)

Net (debt)
cash ($m)

2.8

(88.2)

(30.8)

(13.6)

7.9

5.6

(42.2)

(14.8)

(13.8)

3.9

0.0

(11.8)

(7.1)

(10.2)

(2.0)

0.0

(10.5)

(9.4)

14.9

3.4

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Capex/investments in 2016 include assumed receipt of $16.9m from farm-down deal with Ophir.

Ophir joins APCL in Côte d’Ivoire

In an environment of plummeting oil prices, a large company has been willing to invest in a deepwater exploration block, pointing to the quality of the acreage and vindicating the company’s strategy to reduce risk and seek farm-down partners. We believe Ophir was tempted by the proximity of CI-513 to the Saphir discovery by Total in the adjacent block. Interpretation by APCL suggests that a number of similar prospects in the same play exist in CI-513.

More farm-downs expected over time

CI-513 is just one of 10 blocks that APCL currently holds. Of the remaining assets, we expect the industry to be most interested in the four Senegalese and Gambian blocks, which have been de-risked by the three successful wells drilled by Cairn/FAR in Senegal (including the successful appraisal well announced on 4 January 2016, which tested >8mboe/d) and the wells drilled by Kosmos offshore Mauritania. The APCL blocks allow for entry into an increasingly interesting area for any exploration player.

Valuation: Hopeful of further farm-downs in 2016

Despite the deal, there is no confirmed drilling date in CI-513, and APCL is very likely to need to find further capital to fund its share of the well. As a result, we continue to believe it is too early to assign a RENAV. However, the involvement by a player of Ophir’s size is a notable event for APCL and we hope it augurs well for farm-downs of other blocks. Once wells are scheduled, we expect to assign a RENAV to APCL, although we note that a successful well would increase the company’s value significantly.

An important deal for the company (and country)

The farm-down is an important deal for APCL. In a time of falling oil prices and gloom extending over exploration stocks, it has managed to execute a farm-down with a mid-cap E&P, giving it vital cash resources (of $16.9m) and a partial cost carry for the well. This not only provides further encouragement that a respected third party believes the block to be prospective (and is prepared to sink its valuable cash into the deal), but also shows that interested governments are willing to negotiate on fiscal terms given the lower oil prices.

It is very possible that without such fiscal adjustment, the deal may not have been executed and, as such, we believe the Côte d’Ivoire government has taken an important step that others should follow. In light of the low oil prices, governments in all regions should seriously look to amend fiscal terms if they are to encourage future long-term investment. Such adjustments could easily be made so that governments do not lose out if oil prices increase in the longer term. Reducing costs will help investment decisions in the longer term, but in a time of capital flight away from expensive offshore exploration, we believe governments should show flexibility to capture the exploration dollars for the best interests of their countries.

Exhibit 1: CI-513 adjacent to the 2014 Total Saphir discovery

Source: African Petroleum Corporation

It is clear that the number of farm-down deals for exploration acreage (no discovery yet made) has fallen materially in the last few quarters as exploration budgets have been squeezed. It is a credit to the quality of the assets that APCL has executed a deal.

Exhibit 2: Frequency of exploration acreage farm-outs has fallen

Source: 1Derrick, Bloomberg, Edison Investment Research. Note: Green line is 6m moving average of deal numbers over time. Number of deals is on the left axis (green), with oil prices (black) on the right axis.

Other assets in the portfolio – Senegal and The Gambia

We direct investors to our initiation note, where we give more detail on APCL’s assets. However, we believe the success seen in North-West Africa close to the Senegalese and Gambian blocks is of particular note.

Exhibit 3: Success at Marsouin-1 could lead to multiple further exploration in the southern area, close to APCL’s Rufisque Offshore Profond block

Exhibit 4: APCL blocks are very close to discoveries by Cairn/FAR

Source: Kosmos. Note: Complete yellow circles indicate future planned prospect tests, empty yellow circles are possible prospect tests (by end 2017).

Source: African Petroleum Corporation

Exhibit 3: Success at Marsouin-1 could lead to multiple further exploration in the southern area, close to APCL’s Rufisque Offshore Profond block

Source: Kosmos. Note: Complete yellow circles indicate future planned prospect tests, empty yellow circles are possible prospect tests (by end 2017).

Exhibit 4: APCL blocks are very close to discoveries by Cairn/FAR

Source: African Petroleum Corporation

Senegal

Cairn/FAR have drilled three successful wells including an appraisal well on the SNE discovery announced on 4 January. This suggests that plays in nearby blocks in The Gambia and Senegal held by APCL could be de-risked.

Key points from the Cairn release are below (verbatim):

DST over a 12 metre (m) interval of high-quality pay flowed at a maximum stabilised, but constrained rate of ~8,000bopd on a 48/64" choke, confirming the high deliverability of the principal reservoir unit in the SNE-2 well.

DST over a 15m interval (~3.5m net) of relatively low-quality "heterolithic" pay flowed at a maximum rate of ~1,000 bopd on a 24/64" choke, confirming that these reservoirs are able to produce at viable rates and thus make a material contribution to resource volumes. Flow was unstable due to the 4.5" DST tubing.

Multiple samples of oil and gas recovered to surface from wireline logs and drill stem tests.

Confirmation of correlation of the principal reservoir units between SNE-1 and SNE-2 with the primary reservoirs occurring in the gas cap as predicted.

216m of continuous core taken across the entire reservoir interval with 100% recovery.

Similar oil-down-to and oil-up-to depths seen in SNE-1 – 103m gross (95m in SNE-1).

Pressure, log and seismic data indicate that the hydrocarbon column contains limited segregated reservoir-seal pairs within a continuous connected pressure regime.

Initial indications confirm the same 32 degree API oil quality as seen in SNE-1.

Mauritania (of interest to Senegalese Rufisque Offshore Profond block)

Lying to the north of APCL’s Senegalese blocks, the Marsouin-1 well was Kosmos’s second major discovery of 2015. The well “encountered at least 70 meters (230 feet) of net gas pay in Upper and Lower Cenomanian intervals comprised of excellent quality reservoir sands. Located approximately 60 kilometers north of the basin-opening Tortue-1 gas discovery (renamed Ahmeyim), Marsouin-1 was drilled in nearly 2,400 meters of water”. Kosmos describes it as part of a large-scale petroleum system.

Valuation

We will only assign a RENAV once wells are scheduled and funded. However, it is clear that successful exploration in the company’s blocks could lead to a material increase in the company’s value in time. Our modelling suggests that a risked valuation (assuming a 5% CoS in the block to reflect geological and commercial risks) could be worth around $50m to APCL once a well is scheduled. If a discovery is made, we would expect further increases as de-risking occurs.

Financials

The deal provides APCL with much needed cash as the company was running low (net cash was $0.5m at the end of September, excluding the $12.6m restricted cash and subsequent $2m equity raise). We assume that the $16.9m is received in H116 and is used to continue to fund its activities in farming down the other assets. The cash is very unlikely to cover APCL’s net costs in the CI-513 well and so we expect it to seek to raise further cash in time to fund drilling. This could take the form of receipts from other farm-downs, but could be through equity in extremis. Funding for any subsequent appraisal and/or development would also need to be externally financed, which will likely lead to material dilution of shareholders, albeit compensated by material de-risking of asset(s).

Given the great strides the company has made in cutting overheads, we expect the cash to fund G&A costs for some time.

Exhibit 5: Financial summary

 

 

$'000s

2012

2013

2014

2015e

2016e

Dec

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

3,911

2,794

5,623

0

0

Cost of Sales

0

0

0

0

0

Gross Profit

3,911

2,794

5,623

0

0

EBITDA

 

 

(39,132)

(86,247)

(41,259)

(10,880)

(9,400)

Operating Profit (before amort. and except.)

(40,426)

(87,946)

(42,275)

(11,727)

(10,400)

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

FX gains (losses)

(3,652)

(555)

38

1,250

0

Operating Profit

(44,077)

(88,501)

(42,237)

(10,477)

(10,400)

Net Interest

(6)

(284)

73

(62)

(92)

Profit Before Tax (norm)

 

(40,432)

(88,230)

(42,203)

(11,789)

(10,492)

Profit Before Tax (FRS 3)

 

(44,083)

(88,785)

(42,165)

(10,539)

(10,492)

Tax

0

0

0

0

0

Profit After Tax (norm)

(44,083)

(88,785)

(42,165)

(10,539)

(10,492)

Profit After Tax (FRS 3)

(44,083)

(88,785)

(42,165)

(10,539)

(10,492)

Average Number of Shares Outstanding (m)

575.9

575.9

652.0

106.6

106.6

EPS - as reported (cents)

 

(2.4)

(5.2)

(6.5)

(11.0)

(9.8)

EPS - diluted as reported (cents)

 

(2.4)

(5.2)

(6.5)

(11.0)

(9.8)

EPS - (IFRS) (cents)

 

 

(2.4)

(5.2)

(6.5)

(11.0)

(9.8)

Dividend per share

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

384,316

406,783

397,904

410,538

411,538

Intangible Assets

354,823

403,625

396,497

410,431

411,431

Tangible Assets

6,993

3,158

1,407

107

107

Investments

22,500

0

0

0

0

Current Assets

 

 

129,522

27,472

21,032

15,164

20,571

Stocks

0

0

0

0

0

Debtors

16,506

6,218

3,426

862

862

Cash

52,599

7,914

3,869

375

5,783

Other

60,417

13,340

13,737

13,927

13,927

Current Liabilities

 

 

(25,685)

(30,893)

(32,876)

(38,995)

(38,995)

Creditors

(25,685)

(30,893)

(32,876)

(36,577)

(36,577)

Short term borrowings

0

0

0

(2,418)

(2,418)

Long Term Liabilities

 

 

0

0

0

0

0

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

488,153

403,362

386,059

386,707

393,115

CASH FLOW

Operating Cash Flow

 

 

(21,035)

(30,784)

(14,786)

(7,116)

(9,400)

Net Interest

(6)

(284)

73

(62)

(92)

Tax

0

0

0

0

0

Capex

(214,596)

(13,565)

(13,758)

(10,207)

14,900

Acquisitions/disposals

0

0

0

0

0

Financing

86,513

0

24,680

13,909

0

Dividends

0

0

0

0

0

Net Cash Flow

(149,124)

(44,633)

(3,792)

(3,475)

5,408

Opening net debt/(cash)

 

(204,529)

(52,599)

(7,914)

(3,869)

2,042

Fx gains/losses

(2,806)

(51)

(254)

(44)

0

Other

(0)

0

(0)

(2,393)

0

Closing net debt/(cash)

 

(52,599)

(7,914)

(3,869)

2,042

(3,365)

Source: Edison Investment Research, company accounts. Note: We assign the $16.9m cash receipts to capex/investments line here.

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United Kingdom

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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