Description

Bet $936mil, with downside protection to make up to $3.2bil. This is a bet for the oil experts out there. I am not an expert but I am close to the action and have local knowledge. In this write-up I want to share this knowledge and provide a basic framework which I hope can jump start a deeper and more technical dd on this bet.

Betting on African Oil gives investors a free option on a significant oil discovery in the Orange Basin off the coast of Namibia. TotalEnergies is spending half of its 2023 exploration budget ($300mil) drilling and appraising four wells with two drill rigs as we speak. This program is scheduled to end in December 2023.  

Africa Oil has a market cap of $936mil. Speculation is that the Orange Basin resource is estimated between 3bil and 13bil barrels valued between $3 to $5 per barrel. African Oil owns an effective 6% in these blocks which means that Africa Oil's share is worth between $746mil and $3 200mil assuming $4 per barrel.  The downside, assuming the resource is not economically viable, is protected by producing wells off the coast of Nigeria which are valued between $1 400mil ($60 oil price) and $1 800 ($80 oil price).

Market Cap

Valuation

African Oil owns 5 assets

- Impact Oil (owns a 20% share in Venus), Value = $746mil to $3 200mil

- Prime (3 producing wells) off Nigeria, Value = $1 400mil to $1 800mil

- Exploration assets off the coast of South Africa and Equatorial Guinea, Value = small with big potentail

- Listed Investments in frontier oil companies Eco Atlantic and Africa Energy, Value = small

- Cash balance of $158mil (no debt)

I want to focus on Impact Oil and its assets in the Orange Basin. A brief descriptions of the other assets will follow this discussion.

Impact Oil

Ownership%

African Oil owns 31% of Impact Oil and Gas (a private company) which owns blocks 2912 and 2913B in the Orange Basin. Block 2913B is owned by TotalEnergies (40%), QatarEnergy (30%), Impact (20%), and Namcor (10%). Block 2912 owners are Impact (19%), Total (66%) and Namcor (15%).

Impact also own other exploration assets some of which are very promising. All Impacts assets are shown on this interactive map. https://impactoilandgas.com/assets/

2022: First Round of positive Drill Results

There were two positive finds in 2022 first by Shell and then by Total.

Feb 2022: Shell announced that it had made a significant discovery of light oil in the Graff-1 well, located in block 2913A in the Orange Basin, offshore southern Namibia. The well was drilled to a total depth of 5,376 meters in water depths of approximately 2,000 meters The well encountered approximately 300 meters of net oil pay in a good quality Upper Cretaceous reservoir.

February 2022, TotalEnergies announced that it had made a significant discovery of light oil with associated gas on the Venus prospect, located in block 2913B in the Orange Basin, offshore southern Namibia. The Venus 1-X well encountered approximately 84 meters of net oil pay in a good quality Lower Cretaceous reservoir. The Venus-1X discovery is located approximately 290 kilometres off the coast of Namibia. The well was drilled to a total depth of 6,296 metres, by the Maersk Voyager drillship, and encountered a highquality, light oil-bearing sandstone reservoir

2023: Shell

No full-scale oil and gas production tests were carried out when the original discovery wells were drilled, so both Shell and TotalEnergies are in the midst of carrying out these vital operations which will help determine if their deepwater finds are commercially viable. 

March 2023: Shell announce a light oil discovery in the Jonker-1X deep-water exploration well. The well was drilled in Block 2913A & 2914B. The drilling operations commenced in December 2022 and were completed safely in early March 2023. The Odfjell Deepsea Bollsta semi-submersible rig drilled the well to a total depth of 6,168 meters in a water depth of 2,210 meters.

May 2023: Using the Deepsea Bollsta semi-submersible, Shell re-entered the Graff-1x well in early March and it is understood that drill stem tests (DSTs) carried out in recent weeks generated surprising results, with oil flow rates far exceeding expectations. One well-placed industry source said that when drillers opened the downhole choke, oil “came at them like a train,” which meant care had to be taken to control the flow. Describing one of the tests, the source said the flow rate was “big,” with the oil coming “hard and fast.” DSTs are used to assess a reservoir’s pressure and permeability and can last minutes or days.

2023: Total/Impact

Unfortunately, Total's appraisal program was delayed by the late arrival of there drill ship (Tungsten Explorer) which only arrived in March 2022. The Tungsten explorer is about to be joined by the Deepsea Mira to complete a program targeting up to four wells (including the re-entry of the Venus-1X discovery well, in Block 2913B), to appraise the Venus discovery and to investigate a potential westerly extension of Venus, the Nara prospect on Block 2912.

Venus-1A, the first appraisal well on the Venus structure, located approximately 13km to the north of the Venus-1X discovery well, is currently being drilled using the Tungsten Explorer drillship. After the well has been completed, the Tungsten Explorer will move to Block 2912 to drill Nara-1X exploration well and, if a discovery is made, perform a DST. Concurrently, the Deepsea Mira semisubmersible drilling rig, currently enroute to Namibia, will be used to conduct a DST of Venus-1A and Venus-1X wells. If Nara-1X is successful, the Tungsten Explorer will drill and DST the Nara-1A appraisal well.

On May 22, Upstream reported rumours that the resource intercepted in Venus-1A well met expectations.

Venus — and Shell’s earlier Graff discovery — generated huge excitement when it was found last year in Block 2913B of the Orange basin, with market speculation emerging at the time that it could hold 12 billion barrels of oil and many trillions of cubic feet of gas.

TotalEnergies has tried to dampen resource expectations, but its decision to spend half its 2023 exploration budget on a four-well, two-rig Namibian exploration and appraisal campaign underlines just how big Venus could be.

The drillship Tungsten Explorer is currently operating on the Venus-1A appraisal well, located in about 3000 metres of water, some 13 kilometres north of the Venus-1 discovery well, a bold step-out rarely encountered in exploration circles.

Upstream was told earlier this month that Venus-1A, which began drilling in early March, was in the reservoir and results to date are promising, according to two people with knowledge of the drilling operation. “They are in the reservoir,” said one source, while the second person said “the well has come in on target” — a comment that implies the geology and the reservoir have met pre-drill expectations.

For such a high-risk probe, this news bodes well although the proof of the pudding will only come when the well is tested. Vantage Drilling’s Tungsten Explorer will not carry out a flow test on Venus-1A, with this operation instead left to Odfjell’s drillship Deepsea Mira, which is due to arrive in Walvis Bay on Monday, according to marine intelligence provider VesselsValue.

Before carrying out a flow test on Venus-1A, however, the Deepsea Mira will carry out production tests on the Venus[1]1X discovery well.

Once the Tungsten Explorer wraps up Venus-1A, it will head west to spud and possibly test the Nara-1 probe, targeting what could be a huge extension of Venus. If Nara-1 is a success, the drillship will also drill and test an appraisal well

Vast FPSO potential One person familiar with the drilling campaign in Namibia, told Upstream that if the western extension of Venus meets expectations, then a development could involve multiple floating production, storage and offloading vessels. “If (Nara) is as big as it appears to be, then it could require up to six or seven FPSO’s,” each with a capacity of at least 180,000 barrels per day.

Maggy Shino, Namibia’s Petroleum Commissioner, has suggested that the recoverable reserves discovered in Venus to date stand at about 2 billion barrels. However, one informed source said this figure “probably” applies to the “main” part of Venus in Block 2913B, and not its potential extension into Block 2912.

TotalEnergies had not responded to Upstram’s request for comment by the time of publishing

( https://www.upstreamonline.com/exclusive/totalenergies-on-target-high-risk-drilling-at-global-hotspot-indicates-supermajor-has-a-huge-field-on-its-hands/2-1-1454148 )

What is the Size of the Reserves?

Speculation generally seems to range between 3bil and 13bil boe of recoverable oil. Again from “Upstream” who I find seem to have good sources and break most of the news. 

TotalEnergies’ trailblazing Venus discovery offshore Namibia could be the world’s largest deep-water field, with the potential to far surpass Buzios offshore Brazil where recoverable reserves stand at 11.3 billion barrels of oil equivalent.

Upstream broke the news about the Venus discovery on 23 February, with UK-based consultancy Wood Mackenzie later estimating its recoverable oil reserves to be at least 3 billion boe, with unknown volumes of gas.

But three sources familiar with the latest analysis of data from the Venus-1 wildcat said the huge structure’s recoverable reserves — which are now thought to straddle blocks 2913B and 2912 — could exceed 13 billion boe.

What is the Value of the Reserve?

Speculation is that the resource is worth between $3 to $5 per barrel. This has settled down at $4 per barrel following the recent news/rumours from the Venus-1A drilling program.

African Oil owns 31% of Impact which owns 20% of the blocks. This implies a 6% effective ownership. Assuming $4 a barrel and a range of reserves between 3bil to 13bil the value to African Oil is between $746mil and $3 200mil.   

Prime

I am not an oil expert and have relied on an independent (Risc(uk)) DCF valuation of these assets which range between $1 400mil ($60 oil) and $1 800mil ($80 oil). 

Some salient touch points on this asset include

• African Oil owns 50% of Prime. Prime owns 13% of OML130 operated by Total and 8% of  OML 127 operated by Chevron.
• OML 127 contains the producing Agbami field.
• OML 130 contains the producing Akpo and Egina fields.
• The assets are 100km off the coast of Nigeria.
• All three fields have high quality reservoirs and produce light to medium sweet crude oil through FPSO facilities.
• Akpo and Egina also export associated gas which feeds into the Nigerian liquified natural gas plant, whilst Agbami associated gas is mostly reinjected.
• Indications are for 7 years of reserves.
• The table below shows that production volumes are declining. Management blame this on the difficulty hiring a rig to drill infill wells. Rigs have been hired and the process of adding infill rigs has began. 

• The table also shows the generous dividends that have been paid by Prime (African Oil take 50%). I am not sure what impact the costs of drilling the infill wells will have on the dividend flows from Prime.
• Prime was bought for $520mil in January 2020 and has already returned $650mil as a dividend to African Oil.

Exploration Assets

African Oil owns direct shares in two exploration assets which I will not value. For now, all I want to note is the excitement wrt Block 3B/$B which is having trouble getting off the ground because of obstructions thrown up by environmental groups and the clueless South Africa government that seems to be determined to chase away much needed international capital.

Block 3B/4B

• African Oil owns 20% of this field. The other partners are Azinam (26%) and Ricocure (54%).
• The field is south of Venus on the west coast of South Africa
• It has a geological structure similar to Venus and there is a lot of excitement about this field.
• On March 8, 2023, the Company published an independent review of prospective resources in Block 3B/4B by RISC Advisory (UK). RISC reviewed the prospective resources and probability of geological success of an inventory of exploration prospects within Block 3B/4B and reported total unrisked gross P50 prospective resources of approximately 4 billion barrels of oil equivalent. Probability of success ranges from 11% to 39% over the 24 prospects identified.
• Officially plans are progressing to conduct a two-well campaign on Block 3B/4B and are in discussions with various potential partners to farm out up to a 55% gross working interest in the Block.
• Unofficially the JV partners don’t have the capital to drill these wells and are seeking an oil major as a partner. However, the majors are not interested until the necessary permits have been received from the incompetent government of South Africa who appear intent to chase away much needed investment capital.

Equatorial Guinea

• On February 20, 2023, the Company announced that it had signed two PSCs with the Republic of Equatorial Guinea for offshore Blocks EG-18 and EG-31, which were subsequently ratified on March 1, 2023. The Company holds an 80% operated interest, subject to back in rights by GEPetrol in both blocks. Work programs on both blocks include re-processing of existing 3D seismic surveys and identification of prospects.

Listed Investments

 African Oil owns shares in two Canadian listed frontier oil companies, Eco Atlantic and African Energy. These investments are valued at $37mil. While this is not material, the shares are exposed to some promising exploration assets giving them tremendous optional value that investors need to be aware of should news break.

Eco Atlantic. An international oil and gas exploration company that holds working interests in four exploration blocks offshore Namibia and one exploration block offshore Guyana.

https://www.ecooilandgas.com

Africa Energy Corp. an international oil and gas exploration company that holds a 27.5% participating interest in the offshore Exploration Right for Block 2B in South Africa, an effective 14.6% participating interest in offshore PEL 37, and an effective 9.9% participating interest in the Exploration Right for Block 11B/12B offshore South Africa. The market has been waiting for news on Block 11B/12B which could be a positive catalyst for the stock

https://africaenergycorp.com

Shell Breaking News

As I reach the end of this write-up news has just broken on Upstream about Shell’s immediate plans for Namibia. While I understand that we are all gambling on a binary outcome the large commitment from these "informed" players makes it easier to make this bet. 

Shell has spudded its third exploration well offshore Namibia and, in a move that underscores the huge potential of the red-hot Orange basin play, has extended the charter of the rig it has on duty there.

The supermajor opened up this basin last year via its Graff-1 wildcat and followed this up with a nearby find at La Rona, before charerting the Deepsea Bollsta rig to start a critical exploration and appraisal campaign this year.

This year, Shell has already found oil in a new geological play with Jonker-1 and most recently carried out what Upstream understands was a successful production test on the Graff-1X discovery well, both in Block 2913A.

Deepsea Bollsta has now spudded the Lesedi-1X probe, at a location about 20 kilometres northwest of Graff-1 and 14 kilometres northeast of Jonker, according to data from marine intelligence provider VesselsValue.

The supermajor has also extended the charter period of this semi-submersible, underlining its bullish view of the multi-billion-barrel potential of its two blocks in Namibia’s prolific Orange basin. Deepsea Bollsta's charter was set to conclude this December, but Shell has chosen to extend the contract through to June 2024, with an option available to use the rig for another six months after this

 Meanwhile, Jefferies analyst Giacomo Romeo expects Namibia to be a key talking point on 14 June when Shell chief executive Wael Sawan leads a capital markets day event. Shell’s oil production is currently forecast to decline at up to 2% each year through to 2030, but the Namibian discoveries could alter this trajectory, said Romeo, citing hints by Sawan in recent quarterly conference calls where he talked about the “longevity of oil and gas production”.

Namibian projects could boost Shell’s liquids output by 1% annually by 2028, with a Jefferies’ graph suggesting production from the Orange basin could add about 250,000 barrels per day to its volumes by around 2030.

Conclusion

 A quick recap to end off. Africa Oil has a market cap of $936mil. For this you get the following assets

- Prime (Nigeria) a producing oil field valued between $1400mil and $1800mil.

- Impact Oil. Impact Oil owns several promising exploration assets. I only focused on the Orange Basin asset worth between $746mil and $3 200mil.

- Cash worth $158mil

- Listed investments with lots of optionality valued at $37mil 

- Direct investments in other exploration assets.

I think it is important to note that the owners of Impact Oil know they do not have a balance sheet necessary to support the capex required to bring the Orange Basin field into production. There is speculation that Impact has hired Jeffries to sell this asset and one gets the impression that events could move quickly as information from the drill program is released.  

Catalyst

July/August breaking news with initial results of the Venus appraisal wells.