Afren (LSE: AFR), rated OVERWEIGHT by Barclays Capital
Brent crude is sitting at over $100 per barrel, yet most British upstream oil explorers have been crushed. This offers great opportunities for those prepared to take a longer-term view – such as Afren, the African oil company. In July it made its first inroads into Kurdistan in northern Iraq, investing $588m to buy a 60% working interest in the Barda Rash field and a 20% stake in the adjacent Ain Sifni prospect. This transformational deal was part-funded by a £113m placing at 135p a share. It pushes up Afren’s total contingent reserves to 1,026 million barrels.
The acquisitions (under production-sharing agreements) underline the improving confidence in the political stability of Kurdistan, along with its stronger ties with the Baghdad government in the south. Foreign organisations’ chances of getting paid were made less risky when Norway’s DNO was paid $104m in June by the regional government. This is understood to be the first payment of its kind to any overseas entity relating to oil exports.
Afren’s chief executive Osman Shahenshah estimates that Barda Rash on its own could produce 125,000 barrels of oil per day gross, or 75,000 net by 2017. The crude will initially be trucked to a nearby pipeline and transported abroad via the planned Taq Taq to Ceyhan link. The volume would more than double Afren’s output. Granted, risks are high.
Afren is pursuing a scavenger strategy – it buys unwanted assets cheap from the oil majors as they pull out of volatile regions. The dangers of this approach were illustrated in the first half of the year when the group had logistical delays in transferring oil from its flagship off-shore Ebok field in Nigeria. Other risks include cost inflation, oil price volatility, exploration risk, pollution, natural disasters and foreign-currency fluctuations.
All the same, Afren is a quality business, looking cheap. At a Brent crude price of $90 per barrel, I get an intrinsic worth of more than 150p a share. Barclays has a price target of 200p.
Rating: BUY at 91p