Afren (AFR)

After producing first oil in June from its flagship Okoro Setu project, off the Nigerian coast, Afren is making impressive progress. Production from the first two wells flowed at an initial 3,000 barrels of oil equivalent per day (boepd), which was in line with expectations, but that has now increased to over 7,000boepd. The remaining three wells from the initial five-well programme have now been readied for production, and analysts believe that Okoro could produce around 20,000boepd by the end of 2008.

Moreover, Afren completed the acquisition of Devon Energy's interests in Ivory Coast in September - the group has received full government and regulatory approvals and the deal boosts Afren's production, cash flow and reserves. Specifically, it brings production from a 47.96 per cent working interest and operatorship of Block CI-11, an 80 per cent working interest and operatorship in Block CI-01 and 100 per cent ownership of the onshore Lion Gas Plant.

Current daily production from the Ivory Coast assets is around 5,200boepd net, which will take Afren's production to over 25,000boepd by the end of the year. This represents a substantial daily volume and will generate considerable cash flow, despite an oil price that has fallen from its record $147 a barrel to around $60 a barrel. Afren's low-cost developments (being shallow offshore and close to existing infrastructure) provide further margin security, even should oil fall to $40-50 a barrel.

What's more, the Ivory Coast blocks have combined proved and probable reserves of some 28mboe net to Afren (reserves currently stand at some 70mboe). There's significant scope to enhance production from these assets and management is targeting net daily volumes of over 10,000boepd by 2010.

Afren has also acquired a 40 per cent interest in Oriental Energy's Ebok project, an undeveloped oil field offshore south east Nigeria. The Ebok partners plan to begin drilling two appraisal wells in late 2008. Assuming successful appraisal, Afren will submit a Field Development Plan to the Nigerian authorities in the second quarter of 2009 and the field could come into production as early as 2010.

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After drilling Ebok, Afren will commence an exploration programme at four highly prospective, but risky, wells between late 2008 and early 2009. One will target the Cuda prospect on the Keta exploration block located offshore Ghana - after contract renegotiations, it's estimated that Afren will hold an 88 per cent interest. Bringing in other partners should reduce Afren's interest to around 38 per cent in return for the partners funding the expected $65m deepwater drilling costs. Analysts estimate that the Cuda prospect could hold at least 250mboe with the potential for much more - so drilling could have a transformational impact on Afren. The company also has a 15 per cent interest in an offshore project in Angola, where three wells will each target some 150mboe.

Afren also announced a strategic alliance with Japanese conglomerate Sojitz last month to jointly pursue acquisition opportunities in Africa. The partnership combines Sojitz's financial muscle with Afren's connections and deal-making ability. It increases confidence that Afren will be able pursue its acquisition-led growth plans, potentially leading to deals that are much larger than previous transactions. Sojitz will invest up to $500m in joint acquisitions over a three-year period, and is also investing $45m in Afren immediately, which underpins Afren's financial position.

Operating in West Africa is not without political risks - social tension in Nigeria, for example, have blighted the operations of companies such as Shell. However, in Afren's case, these risks look more than compensated for by rising production and the significant upside potential from the drill-bit.

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