Success with both the drill bit and the pump jack has helped Afren' s (AFR) share price climb near a two-year high - but we think there's more to come for the Africa-focused oil producer in the second half of the year and reiterate our buy advice.
Afren grew net production by 13 per cent in the six months to 30 June, mainly driven by increased output from the development of the Ebok field, offshore Nigeria. At 47,653 barrels of oil-equivalent per day (boepd), production came in at the top end of guidance between 40,000-47,000 boepd and analysts heaped praise on Afren's "solid execution of strategy".
Still, this was partially negated by a 5 per cent fall in the realised oil price to $104 a barrel (£66) on average from $109 in the same period last year. Moreover, an opaque combination of "impairment charges, non-recurring administrative expenses and losses on derivative financial instruments" meant pre-tax profits fell significantly.
Corporate governance has been a touchy subject for Afren this year after the Financial Times lifted the lid on how Afren directors held significant personal stakes in a Nigerian company Afren had been investing in. A rise in administrative expenses for the most recent period to $27m, up from $15m a year ago, will therefore be sure to raise a few eyebrows.
AFREN (AFR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 142p | MARKET VALUE: | £1.5bn | |
| TOUCH: | 141-142p | 12-MONTH HIGH: | 162p | LOW: 118p |
| DIVIDEND YIELD: | nil | PE RATIO: | 15 | |
| NET ASSET VALUE: | 135¢** | NET DEBT: | 47% | |
| Half-year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2012* | 778 | 311 | 9.5 | nil |
| 2013 | 797 | 260 | 5.8 | nil |
| % change | +2 | -16 | -39 | - |
£1=$1.56 *Restated **Includes intangible assets of $1.1bn, or 104¢ a share | ||||
Nevertheless, a string of positive exploration and appraisal results have successfully diverted investor attention elsewhere for the time being. Most impressively, Afren made a potentially large, play-opening discovery with its Ogo-1 well at the OPL 310 licence offshore Nigeria. The company also successfully tested the Simrit-2 well in Kurdistan, where flow rates yielded up to 19,641 barrels of oil per day (bopd).
What's more, shareholders can expect plenty in the way of newsflow over the coming months: Afren is currently completing a sidetrack to the Ogo-1 well; drilling continues at the Maqlub-1 well in Kurdistan; flow testing of the Simrit-3 discovery is ongoing; and the company plans to spud two further wells in Ethiopia and Nigeria imminently.
Bank of America Merrill Lynch forecasts EPS of 27¢ in the current year, rising to 30¢ in 2014 (from 18¢ in 2012).
