When an AIM company changes its name it can often be to try and hide a dodgy past, generally where it has raised money consistently from shareholders but failed to actually deliver anything, but there are also times when it can signal a change to the business and a move in the right direction. That definitely seems to be the case with Afentra (AET) which used to be called Sterling Energy and which I covered a year or so ago as a buy at around 8p, due to its large cash pile relative to the market cap and the potential that it would make a deal for a producing oil or gas asset whilst prices were low. That deal still hasn’t happened, which is something of a negative as oil prices have now recovered and any asset that it does purchase is likely to cost more than it may otherwise have done, and certainly there won’t be much of a chance to pick anything up at a significant discount to fair market value. There have been plenty of other changes though, aside from the name, and the board of directors and senior management team now looks very different, and far more ‘heavy-weight’, following the appointment of a number of names from within the oil industry to replace the outgoing directors.
The team now in place definitely has a track record of success, with a number of them – including CEO Paul McDade and COO Ian Cloke – having previously been successful at Tullow Oil. Between the BOD they have been responsible for bringing online production in excess of 200kbopd as well as managing $10 billion-plus projects, and acquiring and integrating new assets into an existing business. That fits in perfectly with the company's new and clearly defined policy of looking to acquire producing assets in Africa which are starting to be offloaded by the large multinational corporations as they switch focus towards renewables or these assets reach the latter stages of their life, similar to what we have seen happen in the North Sea and elsewhere. The company has stated that it will be looking for assets with proven discovered resources which are yet to be developed and which offer material upside, and where there is potential to extend field life, and where the team can make use of their knowledge and experience.
As we saw with the North Sea, some of these assets may be uneconomic for large companies, or may no longer fit in with their strategy in that part of the world, but can be very lucrative for smaller outfits if they can pick them up at the right price. Serica Energy is the perfect example of that. Obviously in order to achieve any of this the company will require capital to purchase any assets which it feels fits in with its strategy, and that is where its significant cash pile should come into play, as at the end of 2020 it had $42.7 million in the bank. Under the previous management it had been starting to burn through that, as even after reducing its general and administrative costs, those still came in at $2.2 million for last year, and the concern was always that the management would continue to bank a nice salary whilst not actually doing much to acquire an asset, as that money has been sat in the bank for a number of years now. But with a new focus and team onboard it should really be able to put that cash to work, and given the connections of the BOD and their ability to raise significant amounts of cash in the past from the debt market for projects, it wouldn’t surprise me to see them acquiring a larger asset which the cash in the bank only provides part of the funding for. Obviously it is still early days after all the changes and the company does still need to actually go ahead and make a deal, otherwise it will just continue to burn cash as it has been doing, but things definitely look a lot more encouraging, and I doubt these new directors would have come onboard unless they had a clear plan, and possibly even some potential targets already in mind.
The share price has doubled since I last covered the company, and it now trades at around 16p and a market cap of £35 million – it has been as high as the 20p level earlier this month. That means that it is now trading at around a £5 million premium to cash in the bank, and although you could argue that there isn’t so much value now, I believe there was a good reason why it previously traded at such a discount to cash, and that was that the market didn’t trust the BOD to actually make a deal, whereas now the chances of that are much higher and I think that it is still valued cheaply. There does appear to be some selling pressure here at the moment – Hadron Capital had been selling, and its last notification on April 21 showed that it still had 4.92% left, assuming it has continued to sell, and that equates to around 11 million shares, and with daily volume rarely getting much above 1 million, it is quite possible that is causing a drag on the share price. I’m only guessing here as there hasn’t been any subsequent TR1 from Hadron, but it definitely does look although at least one party is selling. On the basis of all this, and my expectations that a deal will come along and will be good for shareholders, including current holders and anyone buying at this price level, I continue to view it as a buy. With patience that might be a chance to get in slightly cheaper, but by doing so you are also gambling that news won’t drop in the meantime, and personally I see enough upside potential that I’d be happy to buy now and not be too fussed about any short term weakness if it was to drop a penny or two lower, as it is all about where the share price ultimately ends up in the future on deal news.
Filed under: Afentra, Argo Blockchain, crypto, tulip, Tern, Cathie Wood, TomWinnifrith.com
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