In a recent blog I mentioned I had taken a speculative investment in a company called ADM Energy. The share price has seen a nice up-lift since my first entry around 2.7p and I could have walked away with a nice quick profit however I’ve decided to increase my stake and here is why…
The company issued their full year 2019 results this week and despite a revenue drop of 19% (in most part due to maintenance and equipment upgrades) the company achieved 148 boepd production. The company also highlighted that it has made significant cost cuts and has cash to see it through the rest of 2020.
I always find it useful to speak to the company when I see an opportunity and hence had the pleasure of speaking with Osamede Okhomina (Osa) the CEO this week. The reason being, despite the history of the company, it can often pay dividends to look at where the company could be heading and to speak to those at the helm, especially if they are a new management team!
I’ll outline the key points around why I have increased my stake in ADM Energy in a bit but before I do I’ll just highlight that Osa was clear, the company are not looking at another large discounted equity placing near-term and as and when the company need to bolster the cash balance their are alternatives on the table.
The Key Points
Having spoken with Osa I can see there is a clear vision to build an African focused Oil & Gas business, not only that but he has the connections and since re-jigging the board the company have agreed the increased stake in OML 113 license (Aje field) to 9.2%. This will result in a 2P reserves increase to 16MMboe when the deal completes Q3!
My interest however is firmly set upon what else the company and Osa might bring to the table, primarily given the company could have access to a $100m financing facility with one of the worlds largest multi-billion dollar commodity traders, Trafigura. This could lead to an interesting deal structure and alliance between the two. There is an interesting article here on this strategic alliance and quote from Trafigura:
“We knew the ADM management previously, so when they approached us asking if we would want to do something at the cooperation level, as opposed to them tendering their barrels or talking to traders for financing, we said, “why not?” It is a well-managed company and it is listed in London, which is very rare for an African player, so we will see if it leads to something.”
Osa clearly couldn’t say too much but it seems discussions are advanced and the focus is on acquiring low-risk, highly accretive producing and/or near-term producing West African assets and this clearly could be the time to do a deal with some of the majors looking at divesting assets, perfect for a nano-cap.
Chairman Peter Francis gives a good overview of what the company strategy is in this recent proactive investors video too.
There is also an interesting house broker note you can read here with the broker assigning a 17p risked valuation, largely driven by the 2P reserves and peer comparison. That equates to a £12.5m cap, circa 4.5x the current valuation.
Bare in mind also, recent investment in previous placings prior to the oil price crash is in at 7p and 16p levels. Oil has since recovered yet ADM hasn’t responded in-line.
For me, at £2.7m market cap when you consider the 2P reserves of 16MMboe, current production set to increase up to 3x in 2021, renewed and clearly driven management team with excellent West African connections and with what seems like a good chance of a significant deal landing in due course I think there could be significant up-side from here.
Clearly all of the above has to be measured against the current macro and oil climate and I’ll say, I had been on the whole reducing my exposure to oil and the sector so its wise to take a sensible risk approach here, however the apparent valuation gap and forward potential makes this particular opportunity for me, to good to ignore on a risk v reward basis.
Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.
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