Things have not worked out as hoped since Anglo African Oil & Gas (LSE:AAOG) was last covered on ValueTheMarkets. AAOG owns 56% of the Tilapia oil field, located off the coast of the Republic of the Congo. Unfortunately, the company’s latest workover did not go according to plan and its shares tanked about 30% over the last 5 trading sessions. But are things as bad as the market would have us believe or does 22p represent a buying opportunity?
A degree of general disappointment in AAOG is understandable. The company’s market communications strategy since the IPO has left quite a lot to be desired. There is a perception that AAOG has missed (or, at best, stretched) operational targets, it has not been overly forthcoming in the announcements it has put out and it has set itself some beefy operational targets, leaving little room to manage expectations. Moving forward this is something AAOG is going to need to fix, but the last week’s sell-off looks like it could have created a buying opportunity in the shares.
The first paragraph of AAOG’s “bombshell” (as the drop in share price would have us believe) RNS read:
“Anglo African Oil & Gas plc, an independent oil and gas developer, announces that testing of the R2 reservoir in well TLP-102 has confirmed the presence of hydrocarbons and pressure within the reservoir. The Company has reperforated the well albeit without achieving flow. Accordingly, AAOG will evaluate the data accumulated during the perforation to determine the best solution and identify further stimulation techniques with the intention of bringing this well into production.”
It would undeniably have been better had oil flowed naturally to the surface at TLP-102, but this play is far from over. On 20 April, AAOG declared its target for the reperforation of the well was production of 100bopd. The market’s expectation was set. A large part of AAOG’s narrative has been built around its supposed low risk workover programme for wells TLP-101 and TLP-102. Re-activated production from these two wells is meant to cover all AAOG’s operating overheads, including Plc costs. Any oil & gas company on AIM, which can cover its running costs is an attractive play, so it makes sense why this company has drawn the level of retail interest it has.
However, the reaction to the so-called failure at TLP-102 seems excessively panicky. When AAOG announced the 100bopd production target from the reperforation of this well, the company took an unnecessary gamble. It pinned investors’ hopes on everything going exactly according to plan. This rarely happens in life and it would have been far better if AAOG had managed expectations better, by clearly describing its Plan B in the event of things not working out.
It is obvious from the quote above that there is a Plan B. When a company reperforates an oil well it does not apply any stimulation techniques to initiate or increase a flow rate. AAOG confirmed the presence of hydrocarbons in the R2 reservoir. It also said it encountered pressure, but not enough for the oil to flow naturally. AAOG has not said it is giving up on TLP-102. Instead it is going to analyse the data from its test and work out how best to proceed.
Looking at this logically, this is a perfectly reasonable approach. TLP-102 can still be brought into production. The market just needs AAOG to explain clearly how this can be achieved.
However, all the focus on TLP-102 is something of a distraction.
The real play for AAOG comes later, when the company goes elephant hunting towards the end of summer. This is what the market has primarily bought into.
AAOG’s next drill will be at TLP-103, to stimulate the Mengo sands and to test the deeper Djeno sands. The targets for these two reservoirs are immense. The Mengo sands are already producing and AAOG is aiming to increase production here to 750bopd. If it achieves this then the company will generate an extra $500,000 revenue per month at $50 oil.
At the deeper Djeno sands the numbers become even more exciting. Here there could be a prospective resource of 58MMbbl of oil. This is much higher risk, but if AAOG makes a significant, commercial discover at the Djeno sands the company’s share price will almost certainly rocket.
AAOG is fully funded for this next phase, so there is plenty of scope for a speculative share price run over the next 10-12 weeks. AIM investors love to fall in love with telephone book numbers. At 22p and with 53million shares in issue, AAOG is worth £11.7m. If TLP-103 turns out to be a genuine duster, then the company’s market cap will likely collapse. However, between now and then there is plenty of time for the market to get itself into a lather, dreaming of riches off the coast of Africa. At 22p this looks like a reasonably priced bet to gamble on.
Buy below 22p.
DISCLOSURE: The author of this article owns shares in AAOG.