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I sold Africa Oil (AOI.TO) today at the open. Here's why:
Africa Oil is blowing out its share count by 53.85% in order to increase its stake in Prime from 50% to 100%.
To recap, Prime is a Nigerian oil & gas investment vehicle holding working interests in producing deepwater basins operated by Chevron and Total.
As of Friday’s closing price of C$2.32 (MCap: C$1.029B), this represents consideration of C$554M. The transaction places an implicit value of C$1.1B on Prime, equivalent to US$804M.
The book value of AOI’s current 50% ownership in Prime is $594M as of Q1 2024. Accounting-wise, the company got itself a good deal.
However, the real value of Prime is far lower.
The after-tax net present value of proved and probable reserves, discounted at 10%, is $1.19B. Plus, Prime’s annual attributable production has been dwindling over the last couple of years, indicating the book value of Prime will be subject to future impairments.
A big chunk of Prime’s assets is goodwill.
In my opinion, that goodwill is worth zero because Nigeria is an unstable country with a history of expropriating oil and gas companies.
I think Africa Oil overpaid, and I do not like management’s decision to increase their Nigeria exposure. This appears to be a repeat of their Kenyan adventure.
Even worse is the way the deal is structured. Post closing, BTG Oil & Gas investors will hold a 35% stake in AOI, but they get to dictate terms to the public listed company – to their benefit (see Investor Rights Agreement section).
The way I see it, BTG’s investors had no prayer of exiting their Prime investment in the private market because no one in the PE space is dumb enough to plow money into a declining O&G asset in Nigeria. So they converted the illiquid investment vehicle into liquid shares of a public listed company.
Even with a lockup agreement, AOI.TO shares and the exposure it offers to Impact is a way better investment for BTG than the illiquid stake in Prime, which has gone from paying fat dividends to requiring higher capex spend.
BTG gets to operate as a separate company within AOI, while dictating terms to the parent.
My investment case for AOI was partly based on the value of Prime, but I was most keen on the Namibian exploration asset which is being compared to Hess’ discovery in Guyana.
I approved of the company using dividends from Prime to buyback shares and maybe engage in additional exploration in safer jurisdictions. I most definitely do not approve of their current plan to dilute shareholders and take more Nigeria risk while providing their JV partners with exit liquidity.
I am always cautious when it comes to value investing. Cheap stocks are cheap for a reason. Management teams with a history of destroying shareholder value tend to continue doing more of the same.
In my defense, I thought… this time will be different. Although I sized the position at under 2% of my stock portfolio, but I’m still bummed about getting this one wrong.
I hit the bid at the open, getting out at C$2.39.
Good Trading!
Kashyap