For any investor with an eye on the huge developments made in oil and gas exploration and production in West Africa in recent years, Afren (LON:AFR) will need little introduction. Since raising $1m in a cramped West End office back in late 2004, the tight-knit entrepreneurial team has captivated the market with its plans, delivered on its objectives and been catapulted into the FTSE 250 with a market cap of over £1.5bn. Afren is a story about African focus, African understanding and African people – a strategy that has opened the doors to Governments and turned it into one of the largest independent oil producers on the continent.
Galib Virani, Associate Director and Afren’s Head of Acquisitions, is unassuming about the blistering pace at which the company has made the transition from small cap AIM stock to fully listed oil and gas mid cap independent. Yet, sitting with Stockopedia in rather smarter offices around the corner from where that first fundraising took place, Kenyan born Galib is in no doubt as to why the company’s strategy has paid off. By embracing indigenous businesses, employing local staff and joining forces with the communities that overlook West Africa’s rich oil fields, Afren has made progress where other oil companies have often struggled.
The company’s first ever deal involved an opportunity to acquire a small non-operated interest in Block 1 of the Nigeria – Sao Tome amp; Principe Joint Development Zone. Since then, a series of deals – mostly focused on bringing discovered but undeveloped assets through to production – took net production in 2010 to 14,300 barrels of oil equivalent per day. Production is currently focused on the Okoro, CI-11 and Lion Gas Plant projects, in Nigeria and the Ivory Coast, but later this year the flagship Ebok field will come on stream. That project is forecast to take daily production to 40,000 barrels per day, with an exit rate of 55,000 barrels by year end 2011. With Afren now realising the increasing cashflow benefits associated with this production growth, the company’s shareholder base has started to diversify from being predominantly the net asset value (NAV) focused British to the more cashflow focused US funds – buying which has seen the Afren share price surge over tenfold from its January 2009 levels.
But it hasn’t always been easy. Selling the community-focused message is an ongoing, often demanding task and drilling for oil in sometimes volatile areas brings its own set of challenges compared to less exotic parts of the world. Nevertheless, Afren is in good company in the region, with its London listed peers Tullow Oil (LON:TLW), Heritage Oil (LON:HOIL), SOCO International (LON:SIA) and Bowleven (LON:BLVN), all active. With the tide flowing with them, Galib and the Afren team have embarked on building the exploration base beyond West Africa. With the recent acquisition of East African focused Black Marlin, Afren is delivering on its promise to be a fully pan African proposition whose assets stretch all the way from the Ivory Coast, through Ghana, Nigeria, Congo Brazzaville, Kenya and Ethiopia to Madagascar and the Seychelles. For Galib, the opportunities for further deals to strengthen the company’s exploration and production profile are not far away.
Galib, before joining Afren you were involved in City mergers and acquisitions so how did that lead to you joining the company?
I was born and raised in Kenya, and have spent the last 25 years travelling to and from Africa so the strong ties with the continent have always been there.. I did a Masters in Finance and research in emerging market finance and then I spent about eight years in the city doing Mamp;A, largely in the oil and gas space. In around 2000 I met one of the founders of Afren (LON:AFR) and we became close family friends. So I knew the thinking that went behind Afren and what he was trying to create – oil and gas upstream in Africa, both of which I was familiar with. What he wanted to do was something very different, to create a company with a very strong African flavour. What the founders saw is that, in time in Africa, you will see greater ownership going to local indigenous companies and Governments wanting to play a bigger role. You realise that there is a gap between asset ownership and capital / capacity, so we wanted to be the bridge between ownership of assets and capital / capacity.
The company was listed in March 2005 and I joined at the end of that year. Back then there were only five of us with very much a blank sheet of paper, just this vision. We listed with one asset, which was just opportunistic, it was a small stake in Block 1 of the Sao Tome amp; Principe Joint Development Zone offshore Nigeria. The big milestone was the Okoro field in Nigeria, which was a field that was discovered in 1974.
It had a discovery and two appraisal wells but was seen to be too small to develop. This was licensed out under an indigenous licensing round to a company called Amni, which the chairman of Afren, Egbert Imomoh, had a very strong relationship with. The partnership works in a way that is typical of all of the partnerships we have in Nigeria. We provided all of the capital for the development, we recovered the capital from 95% of the barrels until cost recovery and then we shared the barrels 50/50. We signed the agreement in 2006, drilled two appraisal wells, had the reserves certified and we raised a $230m facility from BNP Paribas. Remember, this was at a time when the market cap was very small, at just over $100m, so it was quite a feat to be able to raise that finance. Within two years we took it into production and we guided the market to 15,000 barrels a day. We got to 22,000 barrels and the field is still outperforming original guidance – producing between 16,000 to 16,500 barrels a day. We have got two infill wells that we are drilling at the moment, which will add about 3,000 to 5,000 barrels a day of production. That was one of the key events in our history because it gave us an operating track record in Nigeria.
The other big event was the Ebok field. Ebok was similar to Okoro, except it had been discovered by Exxon in the late 1960s. Again, having drilled an appraisal well, they thought it was too small to develop so it was left fallow. The fallow opportunity in Nigeria is huge. Since the 1960s the majors have discovered fields which have been, to their mind, too small to develop and still today the five majors dominate over 95% of the production in joint venture with NNPC, the national oil company.
There about 120 fields, of between 50 million barrels and 150 million barrels that have been discovered but not developed. It is like the Gulf of Mexico or the North Sea 25 years ago when smaller independents came in and reactivated some of those fields, they created a secondary market. We are just seeing that happening now. Pre-drill, Ebok was 25 million barrels. We drilled three appraisal wells, quadrupled the reserves and today the 2P reserves are 102 million barrels, so we have been very lucky in that respect. Adjacent to Ebok are our two assets called Okwok and OML 115, both of which we also acquired with the same indigenous partner. If you aggregate all of the resources around that complex there is about 550 million barrels of 2P reserves and prospective resources. What we’re hoping to do there is create a significant production hub offshore south-east Nigeria. From drilling our first appraisal well to first oil, which should be in the next few weeks, has taken just over two years.
Once production is under way at Ebok, what will that mean for Afren?
There has been a slight delay on Ebok but by the end of February we should be flowing barrels. We should be producing about 35,000 barrels per day by the end of June, which will mean, on an exit rate we should be on about 55,000 barrels per day for the group at the end of the year. We will be one of the largest independent producers, certainly in Africa. Our net interest is 100% in cost recovery and then post-cost recovery we share 50/50 and also pay a net profit interest to Exxon.
The third major milestone in Nigeria is the recent acquisition of OML 26, which was a directly negotiated transaction with the Shell joint venture which is actually a partnership between Shell itself, Total and ENI.. This is an opportunity that has some production from two fields, but at modest levels well below what it should be producing at, three undeveloped “fallow” discoveries and large scale exploration upside. We have been talking about this type of opportunity for a long time. The acreage has 184 million barrels of 2P reserves, 145 million barrels of contingent resources and 550 million barrels of prospective resources. It is a huge onshore position.
What was the background to OML 26 and what potential does that hold for Afren?
It is onshore and it is producing – there are two assets which are producing at just over 5,000 barrels a day but Shell hasn’t drilled a well there since 1996. The technology today, which we have used on Okoro and which we are using on Ebok, involves horizontal drilling, which maximises your recovery. No horizontal wells have been drilled on that complex so we have got a phased development there which will take the production to 50,000 barrels per day within seven years. It will probably get there much quicker but we have given a conservative timeline. What is interesting is we will only need to invest net capex of $40m to get to 50,000 barrels a day, which will be in Phase 1, and because the field is producing the majority of the capex is self-funded.
What does Shell’s attitude to projects like OML 26 reflect about the wider issue of oil majors divesting assets in West Africa?
Shell’s situation in Nigeria is well documented, and certain parts of its onshore portfolio have been subjected to disruptions which is part of the reason that they are revisiting some of their onshore acreage but there are other factors as well. They have their own materiality thresholds, all of the majors do, and they will think very carefully before developing what are to them relatively small to modest sized accumulations . The Major Intenational Oil Companies (IOCs) are typically going after the large, deepwater areas in Nigeria that have the potential to yield giant (500 mmbbls plus) discoveries that can make a greater impact on reserves and production replacement ratios that are all important to them and scaled more appropriately to their operational structures and expertise. So it is part community driven, part scale and the third element is the Major IOCs have been in joint venture with NNPC which, traditionally, haven’t funded themselves on time, which has meant that the majors have had to carry the national oil company. As a result, they have high graded the assets for development and really cherry picked the very large ones knowing that they’re going to have to carry NNPC, so it is a combination of all three.
In the case of OML 26, you have joint ventured with First Hydrocarbon Nigeria. How did you structure that arrangement?
We have got a 45% interest in First Hydrocarbon Nigeria, which has been set up with the vision to become a Nigerian upstream champion. To be really successful in Nigeria in the long term you need to have a company that is majority Nigerian owned. That 55% ownership is now much broader and developing to enable the company to get to the position whereby it will fund itself.
Do you see that model being applicable in all the other markets you are in?
Yes, possibly in producing markets but it is more difficult when the market is predominantly exploration. What we are trying to do is link a company’s performance to local beneficiaries, the actual owners of the assets. Once you have got a wide ownership in a country in which you are producing, and we want to give ownership to the communities as well, there is a vested interest to be successful.
Do you think it will get more difficult for companies that have no African ownership to do deals on the continent going forward?
I regularly meet with governments and industry regulators in Africa and they have real empathy with this model. We are a full cycle business – so we have come in, we’ve explored, appraised, developed, produced – they like that. Oriental, who we partner with on Ebok, had no oil and gas experience when they met us. Today they have got a full team of technical professionals. They have hired geologists, geophysicists, engineers and they all work closely with us. We are building capacity and that is very important to us, so there is a two way benefit. I think it finds favour, it doesn’t necessarily mean that is the only model going forward, but it’s certainly one that finds favour.
What has been your strategy when it comes to expanding your geographic and exploration horizons?
Early on, the ambition was to get into production as quickly as possible, so it was turning the Eamp;P model as we know it here in the small cap sector, on its head. The Eamp;P small cap model was to get an asset, promote it, flip it, get an asset, drill an exploration well, see that huge uplift, sell out and go and do it again. Ours was always to be a full cycle model, so get into production and get a stable production base with growth, and that is now where we have got to.
Our Eamp;P profile, prior to the recent acquisition of Black Marlin, was well represented on appraisal, development and production, in addition to some exploration on West Africa, namely the Keta Block in Ghana, which is east of the Tweneboa and Jubilee fields and OPL 310, which is on the transition zone into deepwater NigeriaSo we thought that with significant production growth we could now take a serious look at East Africa.
East Africa for us was not a matter of if but more a case of when, and fortunately I think we got in just before the major recent hype and interest that we have seen on East Africa. So we looked at various entry modes, we looked at assets and farm-ins and we looked at various corporates. Our technical team here had worked with members of the Black Marlin team in Madagascar about seven or eight years ago , so we knew them fairly well. They were doing a farm down process on their assets and we looked at a couple of them, we liked all of them and we decided to do a corporate deal. Cash wouldn’t have been possible, their expectations of value were well in excess of where the company was trading at the time; they had just listed in Canada. So we put on the table a paper transaction, undervalued Afren paper with Black Marlin paper, put it together and you’ve got quite a neat story, West African production financing East African exploration.
So we got 12 assets through the Black Marlin portfolio and that has really bolstered our exploration portfolio.
To put the East Africa opportunity into context, in West Africa you have had circa 15,000 wells drilled, and in North Africa there have been circa 19,000 wells. In East Africa you have had less than 500 wells, but these comparatively few wells have generated some significant exploration success – Uganda, southern Sudan, in Madagascar there are 20 billion barrels in place, and Yemen. Further encouragement of the regions potential comes from looking at other areas that share the same geological origin. 200 million years ago all the continents as we know them today were joined in one mega land mass called Gondwanaland. This land mass broke apart and the continents drifted over the ensuing period to their current position today. The Bombay and Cambay Highs in India were connected to East Africa, and are prolific oil and gas regions today. Thed same processes were also going on at the same time on the West Africa and South American margin, and we all know what happened there – some of the worlds most prolific oil and gas basins were formed. East Africa has tremendous potential..
I believe you now have more prospective barrels in East Africa than in West Africa?
It is balanced, we have got c. 1.2 billion barrels of oil equivalent in East and c. 1.2 billion barrels in West Africa of prospective resources.
With the Black Marlin deal complete, how do you see your overall acquisition strategy playing out?
Nigeria continues to be a key focus area for us and we are really seeing the signs of a secondary asset market opening up.. If we are able to do four or five OML 26 and/or Ebok type deals in the next three to four years that is about $10bn of market cap. It is quite simply a huge opportunity. In addition, there are one or two corporates that we will look at from time to time and then one or two assets that we can bolt on to our existing acreage.
Looking ahead to the rest of the year, where do you see the big Afren news coming from?
Bear in mind that on Ebok we have really de-risked the project. We have tested three out of the five wells in the Central Fault Block and we got a production rate of 12,500 barrels per day from three wells. From five wells we have guided 15,000 barrels so the likelihood is that we will beat our production targets. You’ve got the MOPU, which is the production unit, and the tanker, the FSO, which are on their way and very close to Nigeria. All the pipelines are in place, the platforms on the Central Fault Block and the platform on the West Fault Block are already in place and being commissioned, so it is just hook up, installation and getting the barrels flowing.
We have quite a bit of exploration news flow this year. There is a farm-down process on Ghana, which is currently in its final stages, and we are looking to bring in an established deepwater operator on good terms with drilling planned in the second half. We’ve got a farm-down on OPL 310 with drilling in the second half and then exploration wells on the Ebok North Fault Block and OML 115 near Ebok at the end of the year plus appraisal drilling on Okwok towards the end of the year. In East Africa wells on L17/L18 in Kenya, a well in Madagascar, data acquisition in Block 1 in Kenya, Block 10A where we are with Tullow Oil (LON:TLW). So in East Africa we will really drill actively next year. It is a huge acreage position so we are still acquiring more data.
It must be exciting for you personally with the Black Marlin acquisition giving you access to the L17/L18 properties in Kenya?
Yes it is very exciting. We shot some seismic last year and it is looking very good. We are still working up the data but it could be a 70 million barrel prospect that we drill. We are looking for oil but it could be gas and if it is gas then there is a ready market there. Electricity generation is going to triple over the next two years. They’re doing it on diesel at the moment, which is very expensive, so the Government would be delighted with a gas discovery.
Do you feel pressure from the market on the production figures? Is there a sense inside the company that you need to be pushing that harder?
I find that UK investors are quite different from North American investors. The UK investors are very much net asset value (NAV) driven, which is reserves growth. As long as you have got the cashflow to explore and to acquire and to grow reserves, they will give you recognition for that. So production as a number, 100,000 – 150,000 barrels, that is not important in itself unless it is financing reserves growth for the UK investors. But the North American investors, they do have a preference for cashflow. You buy Afren, you’ve got underpinning valuation support from production and development assets and with the exploration upside not yet priced in.
It is interesting you say that about the Americans valuing you on the free cashflow, that should make it an interesting year?
The share price is almost three times cash flow; we should be trading at five to seven times cashflow. So the US investors like that, they like the cashflow. They are a fast growing component of the shareholder base. In the last year they have grown from just under 10% to about 22% of the shareholder base, with some really good, high quality institutions. In the days when we were on AIM there were a lot of hedge funds, but now there are a lot of the big, long-only blue-chip institutions.
Thank you Galib for your time.
All the best to you.
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