New issue Anglo African Oil & Gas (AIM: AAOG) has a more attractive risk profile than most junior oil stocks. Importantly it is already a producer, albeit only at a rate of 38 barrels per day. This well is in the Tilapia field in shallow water 1.8 km off the coast of Congo. Having raised a gross £10 million via a placing at 20p, the company has the funds to execute a near term increase in production and drill a new well deeper into the existing formation.
By early May AAOG plans to have completed a two-part workover of its producing asset. The first part is a reactivation of a shut-in well; this will be followed by the installation of a new pump to increase production at the current well. Each job should take only take a fortnight to complete and together they are expected to boost output to 250 barrels a day. As well as creating value, these investments will also move the company into a positive cash flow position.
That should underpin the shares. The upside potential comes from drilling deeper into the field where neighbouring operators are already producing from the formation. Furthermore the first target, in the Mengo formation, was drilled ten years ago and confirmed the presence of oil. It wasn’t developed at the time due to technical limitations, but the necessary fracking stimulation technology is now available. The well will then be drilled further to test the deeper Djeno Sands. This should be a relatively low risk project therefore and is funded by the placing. If successful it could add a further 2,500 barrels per day to the existing production from the workover. Longer term there’s also scope to drill further wells in the Tilapia field.
The management come from a private equity background and were attracted by the risk-reward characteristics of Tilapia. They have no plans to use the cash flow generated to speculate elsewhere, viewing AAOG as a ‘hypothecated’ or ring-fenced asset. Accordingly there’s a commitment to pay out 75 per cent plus of free cash flows as dividends. Miton has taken a 20 per cent stake and City Financial 19 per cent.