By Dr. Michael Green
There was good news out this morning for ADM Energy. In the 14th lifting of crude oil the partners at the Aje Field, part of OML 113 offshore Nigeria, shared 557,091 barrels. ADM’s net share was 33,056 barrels (which equates to the company’s paying interest of approximately 6%). Looking at recent oil prices, we reckon they could have got close on US$42 a barrel, so we are talking about something like US$1.4 million being ADM’s revenue share.
This looks like a smart move by certain Aje Field partners which ducked the 13th lifting given the state of the oil market as a result of COVID-19 stalking the planet. They sensibly stored production on the floating production storage and offloading (FPSO) vessel which can accommodate 750,000 barrels of oil. So, the end result is that ADM has benefited from the recovery in oil prices over recent months. The proceeds of the lifting are going to be used to pay off project debt and should serve to significantly reduce the outstanding balance. At this stage it is worth pointing out on COVID-19, that the company has been able to report that operations at Aje have been largely unaffected.
At the time of this latest announcement Osamede Okhomina, CEO of ADM Energy made the following comment. “Faced with market volatility earlier this year, we chose to take advantage of the large storage capacity onboard the FPSO and to defer oil sales from Aje. It is therefore very pleasing to have now competed the 14th lifting at a significantly higher price than would have been possible earlier in the year. We expect to further benefit in the coming months from rising production at Aje in H2 2020, increasing our stake in the asset as we conclude the EER transaction, and a further improvement in the oil price forward curve.”
The Aje field, part of OML 113, covers an area of 835km² offshore Nigeria and is highly impressive. It has multiple oil, gas and gas condensate reservoirs in the Turonian, Cenomanian and Albian sandstones with five wells drilled to date. Currently, there are two producing wells, Aje-4 in the Cenomanian and Aje-5 in the Turonian. In February 2020, ADM entered into an agreement with ERR (Colobus) Nigeria Limited (EER) to increase its revenue interest in OML 113 from 5% to 9.2%, which is expected to be completed before the year-end. Upon completion, ADM will end up with net 2P reserves of 16.4mmboe (vs 8.9mmboe currently). Based on current production, the company’s share will rise to 196 bopd, up from the current 106 bopd.
Over the past 12 months or so the company has been transformed. The new management team led by CEO Osamede Okhomina has successfully re-positioned ADM as an exciting oil and gas play focused on the West Africa region. Osamede has made no secret of the board’s large-scale plans to build on ADM’s existing asset base in Nigeria and target other investment opportunities in this region with the goal of becoming a significant mid-sized player.
Importantly, the company has already been partially qualified to buy assets from international oil companies (IOCs) like ExxonMobil, Chevron and Shell. In addition, there is the Nigerian government’s Marginal Oil field development programme which will see 50 marginal fields farmed out to indigenous oil companies by the multinational oil companies. ADM will be looking at deals with attractive risk reward profiles with proven reserves, a decent level of historic investment and established infrastructure, along with the promise of early cash flow.
These IOCs have divestment programmes which could see the sale of up to 500,000 bopd sold to independent operators. Typically, development projects in Nigeria would require 2-3 wells to be drilled, with the funding being arranged with institutional partners to buyout the IOC and see companies like ADM taking an equity stake on these assets. These deals generally take six months to complete and it is good news that the team has been working on a number of such deals for a while now.
These acquisition deals from IOCs need to have a local partner and ADM can structure itself to act as a quasi-indigenous partner. Such deals are now available to the company chiefly for cultural reasons. Westerners going into oil and gas deals with Nigerians would probably end up paying some fancy prices and with deal structures that might be difficult to get financed. We believe that CEO Osamede Okhomina, who is a British born Nigerian that graduated from Cambridge University, can successfully bridge the gap between the local businesses and the public market.
ADM is an investor in a world class offshore oil and gas project which is seeking to aggressively build reserves and production with a target of building a significant portfolio of projects across Nigeria and West Africa. The strategic alliance with Trafigura looks to enable the development and financing of such energy projects in Africa, where it looks likely that Trafigura would provide ADM with conditional pre-financing of up to US$100 million for approved projects, as well as subscribe for up to US$20 million in convertible loan notes. This represents very substantial capital which ADM can use to fuel its growth.
In May 2020, we updated our coverage on ADM Energy with a Conviction Buy stance when the price was standing at 2.20p, strongly marking investors’ cards. Now with the stock still sitting at just at 5.30p, we are very happy to reconfirm our stance as the stock still looks grossly undervalued. Buy.
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