Afren’s Interim Management statement suggests all is well

Afren (LON:AFR) , the FTSE 250 listed African focused oil and gas production and exploration company, has today released their interim management statement for the period of 1st January till the 14th May 2010. Some highlights:

The above statements are really just a repeat of what is already known, but the strengthened balance sheet comment may seem strange to some. The balance sheet only has a net cash position of $30m now ($24m down over the period). Thus, you may wonder how in their finals they can say that their balance sheet has been strengthened with an improved net cash position, and a new debt facility, and then state again in this statement that it has been strengthened further when in fact it appears worse. But this would be a misunderstanding - in the finals, although the $450m debt facility secured was mentioned, it was not attained in that financial year, it was attained this year thus the balance sheet via this facility is by far stronger now than in 2009 as they are now fully funded. To go through the report itself:

Production

The statements of most interest here seem to be:

‘Production at the Okoro field in Nigeria has continued to exceed pre-development expectations, with better than expected reservoir performance and aquifer support being the main reasons. Crude oil exports continue to run smoothly via the nearby Ima terminal, where the increased storage capacity (in excess of 1 mmbbls) provides a benefit through the sale of increased parcel sizes and improved shipping and sales economics.’

This looks good for two reasons, 1) the fact that the field is continuing to outperform is obviously an excellent result, 2) the fact that the export of their oil is going well is pleasing also, especially considering the earlier worries in the year about unrest in Nigeria caused via the continued illness of the president who has sadly now passed away.

‘Gross Okoro production over the period was 18,500 bopd. Two infill targets have been identified at Okoro, and are expected to add incremental gross production rates of between 3,000 bopd to 5,000 bopd during the second half of the year.’

This is a good piece of news as it means that production from Okoro could continue to outperform over the year, as if they achieve 5,000 bopd then this will be quite a boost to the previous guidance figure.

Other notes are made in regards to the smaller producing assets:

‘Production in Corte d'Ivoire over the first quarter was impacted due to maintenance work involving the low pressure compressor on the Gulftide production platform and turbo expander at the Lion Gas Plant. Following completion of necessary work, gas production at CI-11 was restored to a gross rate of 30 mmcfd in April 2010. The Lion Gas Plant also received significantly reduced third party inlet volumes over the period as a result of work on the gas compression systems at the CNR operated Espoir and Baobab facilities.’

The above is obviously disappointing for investors. Although they do not mention the production figures, if you consider that they state that net production was 21,000 boepd, down from 22,100 boepd, and then consider that Okoro production was near flat, it means that net production from these two fields dropped by 1,100 or 25%. But the fact is these two fields are pretty much immaterial due to how small they are in comparison to their other assets. However, for anyone worried, the below does sound promising for the rest of the year:

‘At CI-11, a major mapping and seismic re-interpretation exercise has been undertaken applying current understanding of regional Upper Cretaceous depositional systems. The final results of this study will assist in defining plans to access and produce incremental oil and gas reserves.’

Development

This section of the report really just shows that everything is on track, but there were a couple of good comments to be noted still:

‘The Ebok Phase 1 development commenced in December 2009 and is on schedule. The wellhead support structure (WSS) was installed at the field in March 2010, and the Transocean Adriatic lX jack up drilling rig is on location drilling ahead. The initial development phase consists of six horizontal production wells and one water injection well in the central Fault Block 1 and Fault Block 2 areas of the field and will deliver an initial rate of 15,000 bopd in October 2010.’

And:

‘The subsequent development Phase 2, targeting the West Fault Block, will incorporate the installation of an additional dedicated wellhead platform (WHP) and six development wells tied back to the central Ebok MOPU and FSO facilities, and is expected to deliver a further 20,000 bopd by end 2010.’

These statements though expected, are still good as it means that the year-end production target for Ebok is still on track, which is very important for Afren. The next statement is also good reading:

‘Opting for the MOPU and FSO development configuration has provided an estimated total cost saving of over US$50 million in upfront costs and day rate charges compared to alternative FPSO solutions that were considered. Additionally, the selected configuration offers the most flexibility to efficiently and cost-effectively increase processing and storage capacity if required in the future.’

This shows that there decision to delay the initial Ebok production was a smart move as hoped, as a saving on $50m is not to be scoffed at, and is an excellent result.

Exploration and Appraisal

What is most interesting here is what is mentioned on the newly acquired interest in OML 115: 

‘In January 2010, the Company announced the acquisition of an interest in OML 115. The block surrounds the Ebok and Okwok discoveries, where Afren sees the extension of the same D Series reservoirs that have proved to be oil bearing at both Ebok and Okwok, with additional potential also identified in the deeper Qua Iboe, Isonga and Biafra intervals that are also present at Ebok and Okwok.'

This sounds very promising for Afren and could prove to be a very opportune purchase by Afren, as based on what is written, it sounds like this prospect has the potential to be as good as, if not better than Ebok and Obwok (this of course is just pure speculation from what is written).

The other statement of interest is:

'One appraisal well is planned in H2 2010 on the Okwok discovery to confirm and define commercial development requirements of the field. An exploration well on OML 115 will also be drilled in H2 2010. The Ebok Deep exploration well is currently drilling ahead below 8,000 ft.’

The appraisal wells were expected, but the news that it is confirmed that they will drill OML 115 in H2 is good news and something for investors to look forward to, and the fact that the Ebok deep exploration well is progressing well is good news also.

Conclusion

To conclude, everything seems to be going to plan, and they are having such a busy year where they will be drilling no fewer than 19 wells. If all goes to plan not only will 2p reserves be substantially increased, but also by the year end they will be producing approximately 55,000 boepd (they get the gross boepd produced from Okoro and Ebok until their costs are paid back – click here for more info on this). Given the current market cap of £900m, the potential reward seems there for all to see.

Risks remain, as operating in Nigeria opens them to political and terrorist risks, also building up such a large debt means that they need things to go well, not only with their drilling, but in the world markets also. Also, as I have said, their hedging operations are a continued deterrent for some. Nevertheless, the fact remains that the risk reward scenario looks compelling. Their goal of achieving production of 100,000 boepd with a 2p reserve base of over 500mmboe by 2012 still seems on track. There's talk of them continuing to evaluate further acquisition opportunities (earlier in the year they mentioned they were looking at a number of potential acquisition opportunities with the goal of making some in the first half of this year). So they still warrant a place in the growth section of ‘Grays Stocks to Watch’.