Low cost oil and M&A in Africa
Adam J. Zive +234 (01) 448 5387 AZive@rencap.com Alexander Burgansky +7 (495) 258 7904 ABurgansky@rencap.com Elena Savchik+7 (495) 725-5265ESavchik@rencap.comEvgenia Dyshlyuk +7 (495) 258 7777 EDyshlyuk@rencap.com Irina Elinevskaya +7 (495) 783 5662 IElinevskaya@rencap.com Odalo Addeh+234 (01) 448 5387OAddeh@rencap.com
Equity ResearchNovember 2008
Oil and gas
We are initiating coverage of the Sub-Saharan African oils.
-ratedcompanies are Addax Petroleum, Afren plc, Heritage Oil and Oando plc. Our
-rated companies are Mart Resources, Sterling Energy and Tullow Oil.
We believe current valuation levels create a buyingopportunity for long-term investors in large capitalisation companies such as Addax Petroleum at a significant discount to NAV, and companies withsignificant potential to increase reserves that have limited financing risk such as Afren. Our top near-term M&A candidate is Heritage Oil which we believe couldattract significant bid premia. Oando plc is attractive relative to the Nigerianpetroleum marketers and offers integrated growth with an indigenous advantage,in our view. Our NAV models indicate that the sector is currently trading at$41/bbl Brent, half of our long-term oil price forecast of $80/bbl.
Potential financing constraints and relative value.
-ratedcompanies are Mart Resources, Sterling Energy and Tullow Oil. Mart andSterling are both undervalued relative to our NAV estimates; however, financingconstraints could curtail future production growth and/or exploration. Of thelarger capitalisation names, we believe Addax offers better relative value thanTullow as well as a stronger near-term production profile.
Switch from unconventional to conventional.
With lower finding anddevelopment (F&D) and operating costs, African oil producers should befavoured in a lower oil price environment and will continue to provide robustreturns on capital. The African continent also offers many of the most prolificconventional onshore and offshore exploration and development opportunities.
Important disclosures are found at the Disclosures appendix. This research material is released by Renaissance Securities (Cyprus) Limited.Regulated by the Cyprus Securities & Exchange Commission (License No: KEPEY 053/04).
Report date: 17 November 2008
Total sector MktCap, $mn 9,912.90Target MktCap, $mn 14,437.45 Average sector 2010E P/E 2.7 Average sector 2010E EV/EBITDA 2.0 Average sector EV/2P reserves, $/boe 8.51 Average sector EV/2010E production, $/boe 38,714
Summary sector ratings
Ticker Company Current price Target price Rating Upside MktCap $mn EV, $mn
AXC Addax BPN820.00 BPN2,400.00 BUY 192.7% 2,094.41 3,565.80 AFR Afren BPN39.50 BPN91.00 BUY 130.4% 273.28 488.43HOIL Heritage Oil BPN179.50 BPN290.00 BUY 61.6% 715.56 787.34UNIP Oando NGN125.28 NGN200.00 BUY 59.6% 960.71 1,597.71MMT Mart CAD0.065 CAD0.35 HOLD 438.5% 20.20 52.00SEY Sterling BPN3.75 BPN3.00 HOLD -20.0% 136.36 78.40TLW Tullow BPN453.5 BPN600.00 HOLD 32.3% 5,139.28 5,616.50
Source: Renaissance Capital estimates
Figure 1: Price performance – 52 weeks Figure 2: Sector stock performance – 3 months
N o v - 0 7 D e c - 0 7 J a n - 0 8 F e b - 0 8 M a r - 0 8 A p r - 0 8 M a y - 0 8 J u n - 0 8 J u l - 0 8 A u g - 0 8 S e p - 0 8 O c t - 0 8
S&P Energy IndexHOILTLWSEYAXCAFRMMTOando
SEYMMT AXC AFRHOILTLWOANDO-500%-400%-300%-200%-100%0%
Source: MSCI, BloombergSource: MSCI, Bloomberg