A high risk/reward permutation is pretty much applicable to every energy Alternative Investment Market (AIM) stock. Many overpromise only to fizzle out.
So, to pick winners in London’s junior market, I adopt a spot of bottom-up analysis – i.e. place emphasis on the individual stock’s financials while reducing focus on macroeconomic and market cycles to a certain extent.
Among the many AIM-listed energy stocks that I’ve looked at in this vein, minnow Afentra (LSE: AET) stands out. Its core offering includes a portfolio of non-operated mid-life producing oil and gas assets in Africa that the energy majors have retreated from.
The majority of these holdings – both onshore and offshore – are in Angola. They are viable hydrocarbon plays that currently generate revenue. At the midway point of this year, Afentra swung to a $22.2m profit (versus a H1 2023 loss of $3.1m).
Despite a tough macroclimate, wider challenges in the energy sector and oil price declines, this minnow has held its own thanks to an astute hedging strategy, i.e. protecting the majority its per barrel takings via financial instruments at a fixed stable level to manage price volatility.
Operationally prudent
For instance, according to the company’s latest update, it sold 1.68m barrels of crude oil at an average price of $84 per barrel for the first three quarters of the year. “With the final lifting scheduled for Q4 2024, which is 70% hedged with a floor of $70 per barrel, the company is well positioned to continue its disciplined financial management and operational growth,” it noted further.
Afentra also boasts of a FTSE 250 calibre management for an AIM company. It’s led by former Tullow Oil chief executive and industry veteran Paul McDade. Based on my conversations with McDade, Afentra puts operational prudency, transparency and maintaining a low debt profile at the heart of its operations, mindful of negative perceptions often associated with AIM resource stocks.
As of 31 October, Afentra has cash resources of $37.4m and net debt of $4.6m, “while upcoming crude sales will further bolster liquidity.” Future income stability is based on the company’s desire to double its production capacity to 40,000 barrels per day within half a decade and add more barrels through further acquisitions.
Prospects and caveats
I believe Afentra potentially has room for upside from its current range of 40p to 60p to around 250p to 320p in five years. This is based on a calculation of four times its projected current end-year financial revenue ($180m) divided by the number of its issued shares.
The company’s efforts to double its production by 2029 and selling oil at an average price of $70 per barrel also appears broadly supportive of a 4x revenue projection as a basis for the calculation.
Of course, currency fluctuations and the strength of the dollar will have a say. Were oil prices to slide progressively further and faster to the end of the current decade, so will Afentra’s earnings. Planned production increases may not materialise. Such factors will impact the company’s future share price.
However, for me, potential rewards currently outweigh the risks of holding Afentra. The company appears to have medium to long-term potential and it’s why I’d be happy to add more of its shares to my portfolio.