Aim-traded oil and gas producer Afren has entered into a partnership with Sojitz, a major Japanese conglomerate, to jointly pursue acquisition opportunities in Africa. Sojitz has committed to invest up to $500m (£315m) over a three-year period in these acquisitions and will also immediately invest $45m in Afren through loan notes, providing additional headroom to Afren's existing financial resources.
The partnership will combine Sojitz's financial strength with Afren management's well-connected deal-making ability. It will enable Afren to pursue more sizeable acquisition opportunities to rapidly grow the size of its reserve base.
In June, Afren produced first oil from its flagship Okoro Setu project, offshore Nigeria. Production rates from the initial two wells flowed in excess of 7,000 barrels of oil per day (bopd) and full production is estimated at 15,000 bopd. The addition of eight assets across four West African countries provides further production, near-term development and high potential exploration.
MORGAN STANLEY:
Overweight. The partnership increases our confidence that Afren will be able to pursue its acquisition growth plans in Africa despite tight credit markets. The shares have fallen due to concerns around Afren's current funding position and the immediate investment of $45m should alleviate these concerns. The partnership brings scale and highlights Afren's unrivalled access to opportunities in Africa. Deal targets could be over 100m barrels of oil equivalent (mboe) of reserves, which would materially increase the size of Afren's existing reserves of around 70mboe.
MERRILL LYNCH:
Buy. We see the deal as a positive turning point for Afren, which is on track with its African scavenger growth strategy. The deal both underpins a solid funding profile during a time of market concern around exploration & production (E&P) funding risk, and enables Afren to reinvigorate its dealflow and pursue deals of considerably greater scale. The shares have significant upside to our net asset value of 136p a share, and the attractive valuation looks well set to benefit from accretive (and now more likely) dealflow in the future.
