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Crude Valuations - Low Cost Oil and M&A in Africa - Renaissance Capital Research

Crude Valuations - Low Cost Oil and M&A in Africa - Renaissance Capital Research

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A review of the M&A environment and business prospects for energy companies operating on the African continent.
A review of the M&A environment and business prospects for energy companies operating on the African continent.

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Published by: Customs Street Advisors on Feb 26, 2009
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Oil and gas
Africa
Sector report
Equity Research17 November 2008
Crude valuations
Low cost oil and M&A in Africa
Adam J. Zive+234 (01) 448 5387AZive@rencap.comAlexander Burgansky+7 (495) 258 7904ABurgansky@rencap.comElena Savchik+7 (495) 725-5265ESavchik@rencap.comEvgenia Dyshlyuk+7 (495) 258 7777EDyshlyuk@rencap.comIrina Elinevskaya+7 (495) 783 5662IElinevskaya@rencap.comOdalo Addeh+234 (01) 448 5387OAddeh@rencap.com
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).
 
Crude valuations
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
Sector report
Equity ResearchNovember 2008
Oil and gas
 Africa
 
We are initiating coverage of the Sub-Saharan African oils.
Our 
BUY
-ratedcompanies are Addax Petroleum, Afren plc, Heritage Oil and Oando plc. Our 
HOLD
-rated companies are Mart Resources, Sterling Energy and Tullow Oil.
 
Crude valuations.
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.
Our 
HOLD
-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
-110%-10%90%190%290%
    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
 
2007 Reviewed
November 2008 Africa oil and gas Renaissance Capital
2
Executive summary 3
 
Crude valuations: Low cost oil and M&A in the African oil patch 3
 
Crude valuations: Easiest trade is Addax, Heritage for M&A, Afrenand Oando for growth 6
 
Increasing M&A activity 9
 
Elephant hunters: An endangered E&P species 11
 
Niger Delta 12
 
Significant low risk development opportunities in the Niger Delta 12
 
But no end in sight for the ongoing conflict… 12
 
Nigeria gas monetisation… a long-term strategy 14
 
Nigerian flares down? 14
 
Growing low cost reserves 15
 
Near –term commodity price weakness 18
 
Near-term commodity price weakness, position for long term 18
 
The companies 21
 
Addax Petroleum 23Afren plc 51Heritage Oil 75Oando plc 95Mart Resources 117Sterling Energy 133Tullow Oil 147Disclosures appendix 179
 
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