Tanzania-focused energy firm Aminex (LSE:AEX) is profitable, completely debt free, and sitting on top of a 1.3Tcf (trillion cubic feet) natural gas reserve. So why are AIM investors giving it the cold shoulder?
Shares slipped from around 5p last August to languish at around 3p over recent weeks, despite a steady stream of news flow portraying a financially robust business on the verge of processing a vast resource. With Aminex’s Ntorya discovery offering great upside potential and Tanzania providing a stable, developing resource-rich backdrop, concerns over liquidity and fears associated with operating in Africa might seem overcooked. At just 3p a share, Aminex could offer a great value opportunity. Be quick though, with a couple of potentially big developments on the horizon, investors may find that the business does not remain this cheap for long.
Cooking with gas
Listed on both the London and Irish stock exchanges, Aminex is a low cost producer and developer of oil and gas assets, primarily based in Tanzania. The company is currently operator and 75pc owner of a production sharing agreement in the Ruvuma hydrocarbon basin in Southern Tanzania, and 57.5pc owner and operator of the producing Kiliwani North field in the country. Last year was a busy one for Aminex. The business is yet to post its full year results, but H1 2017 saw it pay off a corporate loan, become completely debt free and generate a profit of $1m, up from a loss of $2.5m in H1 2016. Profits for the period were generated at the firm’s Kiliwani North site, which produced an average of 15MMCFD (million cubic feet of gas per day), but the company’s true value going forward lies in its assets in Ruvuma.
The Ruvuma Basin is estimated to contain a whopping 160Tcf of gas, and Aminex’s joint venture production sharing agreement with Solo Oil (which owns a 25pc stake) covers a decent 6,079km2 chunk of the area. The agreement includes Aminex’s Ntorya discovery, which is estimated to include more that 1.3Tcf of gas, and this figure looks set to continue to rise as more drilling takes place. For context, Kiliwani North is expected to have produced just 3.6bcf of gas in 2017. As chief executive Jay Bhattacherjee put it to ValueTheMarkets.com last week: ‘1.3Tcf really is a lot of gas.’ The Ntorya discovery is currently made up of two wells – Ntorya-1 and Ntorya-2 – with a third well (Ntorya-3, naturally) due to be drilled this year, once Aminex has found a suitable rig. In an update earlier this month, Aminex told the market that progress at Ntorya-3 was well on its way, with the company actively engaging with Tanzanian authorities and engineering firms on well planning and drilling management.
Although Aminex remains focused on its Kiliwani North site – it is currently in the process of installing compression facilities to maximise production there – Ntorya and the Ruvuma Basin are where the firm’s true future prospects lie. A big gas field in North America typically has gas reserves of around 1-10Bcf, while a particularly large field will contain between 500bcf and 1Tcf. Anything over 1Tcf begins to be globally recognised as a significant field. With its reserves coming in at 1.3Tcf, Bhattacherjee described Aminex’s Ntorya discovery as ‘an asset of national importance’, which has the power to change the country’s rate of industrialisation for the better. This fact sweetens the Ntorya discovery even more for Aminex. Because of the Ruvuma Basin’s national importance, Tanzania’s government has built the infrastructure needed to get gas out of the ground for the firm, greatly cutting costs. This is true across all of Tanzania as well, with Aminex also enjoying this government support at Kiliwani. In H1 2017, total cost of sales came in at just $1.5m against revenues of $4.6m. Production costs came in at a very low £89,000.
Bhattacherjee estimates that the firm is currently getting a netback (gas price gas sales net of royalties, production and transportation expenses) of about $3.25 per Mcf (one thousand cubic of natural gas) at Kiliwani. At this price, a 75pc share of the sale of 1.3Tcf of gas would be worth a very considerable amount against Aminex’s current £111.1m market cap. This is highly speculative of course; Aminex has not yet revealed at what rate it plans to process Ntorya’s gas, and is still negotiating the terms of production. However, it is no wonder that Bhattacherjee is keen to move into the development stage and get into production as quickly as possible once a rig has been found for Ntorya-3.
Earlier this month, the firm said discussions are ongoing with the Tanzanian authorities to progress the outstanding Ntorya development licence application. ‘Because Tanzania’s government has provided a lot of the infrastructure, in our gas pricing we do not have to pay for any facilities. This is unique to Tanzania, and means we get a very high netback from each Mcf. As a result, these Bcfs we are producing at Kiliwani and at Ntorya in the future are really valuable,’ he says.
‘Ntorya has gotten bigger and bigger with every well that we drill and we are about to release a new competent persons report across our assets, and hopefully the figures from the audited report will verify just how big this asset is.
North Sea pt II
Aminex is one of just five natural gas explorers and producers operating in Tanzania, and is being bolstered by a huge move towards the resource in the country over the last two decades. Across East Africa, gas consumption is set to exceed supply over the coming years as it increasingly becomes the energy source of choice and a number power and industrial plants are completed. Despite this opportunity, Tanzania remains an emerging economy, and a lack of infrastructure in the country means that companies operating there can often be hit by delays and escalating costs. This does not concern Bhattacherjee, however, who compares the country’s natural gas market to the North Sea some 40 years ago in terms of the momentum it is gathering.
‘There was not a lot out at the North Sea back then. People did not want to bring rigs out there and the infrastructure was not there, but now it is totally developed. We are in the early stages of onshore development in Tanzania. things are slower than we like compared to developed nations, but this is a developing nation, it is not like the UK,’ he says.
‘Gas is a wonderful way for Tanzania to industrialise itself. It is a nice country with a growing economy that is well positioned for products going to the Middle East and China. Energy is growth, and growth down in Tanzania is irreversible. Once people turn lights on and do things that they could never do before, there is no turning back.
‘In terms of providing for this growing demand, Ruvuma is the only game in town for some time.’
According to Business Monitor International Research, as of the end of 2017, Tanzania has a total natural gas reserve of 1.6Tcm (trillion cubic metres), which converts to about 56.5Tcf. If this is correct, then not only does Ntorya make up a significant share of the total Tanzanian market, but Aminex could have plenty more mileage when it comes to exploration in the country. Bhattacherjee says that while Aminex is keen to grow as a business and is looking at all opportunities, its current focus is on bringing Ntorya into the production and development phase.
‘We are approaching things with a production development appraisal hat on rather than an exploratory hat for now,’ he says.
Where is the love?
Overall Aminex’s lack of debt, profitability, large pool of reserves, and supportive macroeconomic backdrop offer more than enough of a basis for a punt at its current 3p share price. But the company’s shares have drifted since the beginning of Q4 2017, and have sat around their current level throughout much of December and January. There could be several reasons for this hesitance. Firstly, Aminex’s two largest shareholders currently own nearly 40pc of the firm’s shares, something that will naturally raise concerns around liquidity and intentions in the minds of many investors. One of these shareholders is Majedie, a well-known UK asset manager, which owns a 9.9pc stake. The other is Eclipse Investments, which owns a 29.9pc stake. Eclipse is owned by Zubair, one of the richest families in Oman. Bhattacherjee says any concerns here are misguided, and claims that Eclipse’s main strategy is to provide support for Aminex. Another issue which he believes to be present in the marketplace is a mis-understanding of what it takes to operate in Africa, a fallacy powered by the belief that attempts at success there are held back by delays and operational issues.
‘There is always going to be some of that, but we have been doing a good job of managing it. I think retail investors like to see drilling activity and corporate activity like M&A and asset acquisitions. We are a company that wants to grow, so hopefully retail shareholders will appreciate that and find our story exciting as well,’ he says.
Going forward, there are two pieces of key news, which could prompt a rise in Aminex’s share price over the short-term. Firstly, the company has commissioned an independent evaluation report covering all of its Tanzanian resources, which is on track to be completed early this year. The report supersedes and updates previous reports on Aminex’s resources, reflecting its recent activity. Bhattacherjee says Aminex chose to carry out the report to validate its reserve figures with a third party, giving them more weight.
‘Over the long term, for our shareholder base – myself included as one of the bigger private shareholders – our own resource numbers are great to have. But we believe in that asset, and think it could drive production as far ahead as the next two decades, and we thought a CPR report would validate it completely before we embark on this,’ he says.
Investors might also be waiting for Aminex to announce that it has secured a rig for Ntorya-3, as this currently represents one of the last barriers to production at the discovery. Earlier this month, the firm said a tender process is in progress for a rig to drill the well, other opportunities in the field and Aminex’s other assets in Tanzania. Clearly, this brings with it the chance for even more attractive reserve estimates. According to Bhattacherjee, finding a rig is a more difficult process than many would assume because of a lack of availablity in East Africa, as much of the equipment is targeted toward offshore developments rather than onshore.
‘We need to find a rig that is suitable for us to drill through all the targets we have identified and in the case that something breaks down we need to be able to easily get parts. If you get a rig that is too advanced and modern you will have to fly in parts, which can be very costly,’ he says.
‘We are trying to strike a balance between not finding a piece of junk and not not finding a Ferrari. This is a hard task for us to do when there is not a great deal of availability around.’
All’s well that ends well
It will be interesting to see how the market reacts to these two potentially important pieces of news; a third party reserve report and the acquisition of a rig could give some investors some much needed confidence in Aminex. Aminex is very well positioned in a growing market and could truly be on the verge of a significant payday with the Ntorya discovery.
The author of this piece does not own shares in any of the companies covered in this article.