With high oil prices, investors have been flocking to traditional integrated oil leaders such as Exxon Mobil (XOM) or Chevron (CVX). However, after launching its IPO in 2005, Afren (AFRNF.PK) is on the verge on becoming the Pan African oil company. Sub-Saharan Africa is the fastest growing region for new oil reserves on the earth, and Afren is the best way to invest in this growth due to its track record of proven production, sound management with strong local African representation, rights to several big ticket exploration properties, and geographical diversification to hedge political risk.
Afren Plc is an oil conglomerate based in London, but whose primary operations are at offshore sites on the western coast of Africa. Unlike many other oil operations in emerging markets such as Petrobras (PBR), Petronas, and CNOOC (CEO), Afren is privately run and lacks the political conflicts of interest that exist in state-operated enterprises. The company has two major sites in production, the Okoro fields in Nigeria that produce 18,000 barrels of oil per day, and the CI-11 site on the Ivory Coast that produces 7,000 barrels per day. In addition to these two sites, Afren also is currently developing the Ebok site of the coast of Nigeria that contains 128 million barrels of reserves. Afren will put the Ebok site into production by the end of 2011 with an initial production rate of 50,000 barrels per day.
Along with the production coming from the Ebok site, Afren has several sites throughout the continent in the exploration and appraisal stages of development. Only 38% of Afren’s current proven reserves are currently in production, which means that there is plenty of room for growth.
Throughout western Africa (Ghana, Nigeria, Ivory Coast, Sao Tome and Principe, and the Congo), Afren has shares in ten sites in development that hold over one billion barrels of future reserves. With the acquisition of the Canadian exploration company Black Marlin, Afren now also has exposure to East Africa with onshore exploration sites in Kenya, Tanzania, Madagascar, and Ethiopia. Afren also owns a 75% of 436 million barrels of oil offshore in the Seychelles that is expected to enter production in 2012. The bottom line is that Afren has billions of barrels of new oil reserves that, when entered into production, will allow Afren to rival such companies such Gazprom (GZPFY.PK), Petrobras, and PetroChina (PTR) as the top emerging market oil company.
Unlike many other oil ventures in Africa, Afren effectively uses geographical diversification to protect itself against unfavorable regime changes or potential civil wars commonly found in Africa. Spanning over eleven countries, Afren’s production will not be entirely wrecked by one geopolitical crisis. Management also has made strong effort to form partnerships with local oil producers and governments that leads to mutually beneficial cooperation. Afren has also been a source of gainful employment for many local Nigerians, which has helped them receive favor with both of the country’s major factions. However, most of the current production is based out of mainly one country: Nigeria. Investors who buy Afren need to keep an eye on the geopolitical climate of Nigeria until more future reserves open elsewhere.
Financially, the company has started to show positive returns. Profit margins are now up to 14.36% and the long term debt/equity ratio has fallen to 0.2. An expected five-year annual earnings growth rate of 42.95% can justify its high valuations and makes a P/E of 58 look reasonable. Nevertheless, Afren is highly risky with vast fluctuations in earnings by quarter. Investing in Africa is a high risk trade, but also can be a very rewarding one in the long term.
Similar to Standard Oil in the late 19th century, Afren is solidifying itself as the continent’s dominant oil producer. With geographical and diplomatic hedging of political risk, enormous growth potential of exploration reserves, and the growing global demand for oil, Afren should be able to thrive. In addition, Afren also is located in one of the few regions where oil reserves are growing instead of shrinking. Oil dependency will not die in a day, and more oil will need to be tapped from Sub Saharan sources such as Afren to feed demand. For those who don’t mind taking a little risk, Afren is a great play on the growing impact of African energy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AFRNY.PK over the next 72 hours.