US Edition Afren
87¾p-3¾p
Questor says BUY
The main reason to invest in mid-tier oil exploration and production groups is that their shares can rise irrespective of what is happening to global GDP. With the economic outlook so uncertain, this is a good thing.
The reason for this is down to risk assumptions in analysts’ models. As progress is made on each individual well, its value in the model is increased as the prospect is “de-risked”. Obviously, the reverse is also true. Should there be any failures at a well, the amount at which an oil target is valued in analysts’ models will be reduced. However, the valuation of the company will be driven by the progress it has made and not external factors.
Afren has grown significantly since it listed in 2005. It has grown from a market cap of about £25m to today’s valuation north of £700m. The group moved on to the main board last week and there is a strong possibility the company will enter the FTSE 250 in this week’s reshuffle.
Production is expected to rise to 60,000 barrels of oil per day (bopd) in 2010, with 100,000 bopd expected by the end of 2012. Current production is about 26,000 bopd.
Ahead of this likely move to the official list, the group raised £105m through a placing. The funds will be used to accelerate development of its Ebok and Okwok fields, located off the coast of Nigeria, to fund exploratory drilling in Ivory Coast and cut debt.
The market is expecting an update soon on a potential acquisition and joint venture in Nigeria – and some of the funds may also be used for this.
West Africa is vital for America’s plan to reduce its dependence on Middle Eastern oil. The area already supplies the US with about 15pc of its oil needs and America is targeting about 25pc of its requirements to come from the region by 2015. Nigeria is key to this target being met.
There have been well documented problems in Nigeria for oil majors such as Shell. Afren has established a fully indigenous subsidiary to counter this. This should mean that there is less local opposition to the company and it could provide long-term opportunities to act as a local partner for international oil companies. Indeed, legislation making its way through the Nigerian parliament may be of benefit to Afren, according to some analysts. The new legislative framework for Nigeria’s oil sector is being hammered out and should be completed in the first quarter of next year.
The country is trying to boost its oil production to make the most of US interest in oil from the region. This means there is the possibility that unexplored acreage to which oil majors have exploration rights and marginal fields may have to be sold off.
Egbert Imomoh, the chairman of Afren, has 36 years’ experience working with Shell in Nigeria. Osman Shahenshah, the chief executive, is an oil and gas finance veteran who started his career at Credit Suisse.
The expected uptick in production can be seen in the company’s earnings multiples. The shares are trading on a heady December 2009 multiple of 86.6 times – but this falls to just six next year and five in 2011.
The shares were recommended on July 2 at 58½p and they are now up 50pc compared with a market 25pc ahead.
The stance on the shares remains buy.
Shanks
128½p+38.4p
Questor says HOLD
Everything has a price. If a good offer is made for an asset it is foolish to pass it by. However, in the case of Shanks, Questor agrees with management and believes the current offer should be higher.
As revealed in yesterday’s Daily Telegraph, a private equity group – believed to be Carlyle – has made an unsolicited offer for Shanks at 135p a share. Management believes this undervalues the business and said they would like to see an offer of 150p a share or more.
The thing to remember about Shanks is that the company is not distressed. It recapitalised its balance sheet in May and is well placed for an economic recovery. The company is not under financial stress of any sort.
Once industrial activity improves, the company should start to throw off cash. The private equity house interested in the company will understand this very well – and that’s why it has pounced now.
The bid has underscored the value in Shanks and the excellent market in which it operates. The group sold most of its landfill operations to Guy Hands’ Terra Firma in 2004 and has been focusing on recycling and energy from waste projects. This is likely to be the future of waste management.
The shares were first tipped on April 4 and Questor then recommended taking up the group’s rights issue in May. Adjusting for this, the tip price was 69p, so the shares are now 86pc ahead of their recommendation price compared with the FTSE 100’s 31pc gain. Shanks’s shares are now trading on a March 2010 earnings multiple of 16.2 times, falling to 16.7 next year.
Shares should never be bought in the hopes of a bid alone – if current talks end there is likely to be a fall in the shares price, despite some analysts talking about rival bidders emerging. Shanks did, after all, describe the approach as “highly preliminary”.
The stance on the shares is now a hold until the bid situation is resolved.