Barclays Capitol "Afren is our top pick" Pall Mall East, London Middlesex England

In this report we initiate on 10 stocks. For each company our analysis is based on two key 

components: 1) best risked value: an NAV valuation approach, which includes both core 

assets (producing and under development) and risked exploration and appraisal (E&A) 

upside; 2) we have then analysed the business model of each company and ranked the 

group based on what, in our view, are the key sector drivers that make a business model 

successful. By combining our NAV valuation and business model analysis, we have assigned 

our relative 1-OW, 2-EW and 3-UW stock recommendations. 

Based on this analysis we have selected Afren as our top pick. In our view, the company 

currently offers the best potential upside, at 49%, from its current share price. This is mainly 

generated by its existing producing and E&A assets in Nigeria. In addition, Afren scores highly 

in our business model ranking due to the size of its E&A portfolio, its good geological risk 

diversification, and leverage from future opportunities. However, because of the location of 

Afren’s operations in Nigeria, we ascribe a higher degree of political risk than for its peers.  

Best risked value – an NAV approach 

In valuing each individual stock, we have used a risk-based methodology which aims at

finding the Net Asset Value through a bottom-up approach. We have grouped each 

company’s assets into two main categories: Core NAV, which reflects the value of producing 

assets and those under development, and risked upside which is generated by the value of 

the company’s exploration and appraisal assets on a risked basis. We have named the risk 

factors applied to the E&A assets ‘Chance of Success’ (CoS), as commonly known within the 

industry. They reflect the geological likelihood of finding hydrocarbons. 

Business model – key drivers for the sector 

The companies in our coverage universe are very diverse; each one of them has a different

geographical focus and spread, strategy and bias towards exploration. Each stock has a key 

strength, which is ultimately its main value proposition. With this myriad of business models, 

we have identified a number of investment themes which we hope will help investors to better 

understand the value drivers in the E&P sector. These are: 1) risked E&A exposure related to 

the target price; 2) track record; 3) geographical focus; 4) geological risk diversification; 5) 

blue-sky scenario; 6) financial flexibility; 7) value relative to past transactions; and 8) political 

risk. We also assign different weightings based on what, in our view, are the key drivers of the 

sector. Finally, for each theme we select those stocks which we believe stand out.  

Best risked value – Afren offers the highest upside potential

The first key component of our sector analysis is aimed at indentifying those stocks which offer 

best risked value compared to their current share price. Our valuation methodology calculates 

the Net Asset Value (NAV) of each company, reflecting a bottom-up analysis. This includes 

producing and under-development assets (Core NAV) and exploration and appraisal assets 

(risked upside). We make adjustments to reflect the value of monetary items on the balance 

sheet. We do not include the present value of G&A costs, as our price target reflects the 

liquidation price which also allows an asset comparison across different stocks. Our final price 

target is equal to Total NAV. We have also applied a standard industry 10% discount rate. 

 

On this measure, Afren offers the best risked value, with 49% potential upside from the current 

share price. Its risked E&A portfolio accounts for 47% of our price target, reflecting its bias 

towards appraisal opportunities mainly in Ebok and Okwok. In addition, over the next 12 

months the company is planning to step up its exploration programme, with an additional three 

to four exploration wells in various blocks in Nigeria and Ghana. We also believe the company is 

well positioned to capture some potential upside following the recent push from Nigerian 

authorities to develop fallow discoveries. We have included some reinvestment opportunities in 

Afren’s NAV. Although on a risked basis they currently generate just 2% of our price target, we 

believe they could play a key role in the stock’s future growth. In addition, we value Afren’s 

recent acquisition of Black Marlin Energy at 11p risked, or 8% of its target price.