Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room for further gains.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gaurav Sharma owns shares in Afentra. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

Best British value stocks to consider buying in December

We asked our freelance writers to reveal their top value shares, including one 'Fire' and one 'Ice' recommendation...

Read more »

Dividend Shares

£3k in savings? Investors could consider putting it here for juicy second income

Jon Smith talks through how investors could buy dividend stocks with yield potential in excess of 6.5% for second income

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Why the boohoo share price soared by almost 14% in November

Is troubled online fashion retailer boohoo beginning a turnaround that may cause the share price to rocket through 2025 and…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

Here’s how saving £5.40 a day could net me £1,971 yearly passive income for life

The price of a cup of coffee seems to have broken the £5 mark. Is it time to put that…

Read more »

Investing Articles

2 top FTSE 100 stocks surging to record highs (hint — not Rolls-Royce)!

Ben McPoland takes a closer look at a pair of high-performing FTSE 100 stocks that continue to enrich long-term shareholders.

Read more »

Investing Articles

A cheap FTSE 100 share to consider buying for the next 10 years!

This FTSE 100 share has pride of place in my portfolio. Here's why I think it could be a top…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Down 44% in 2 months! Is this FTSE 250 green energy pioneer priced too cheaply?

After a sharp tumble in recent months, this FTSE 250 company with a growing order book is almost 90% below…

Read more »

Investing Articles

Investing a £20k Stocks and Shares ISA in this high-yielder might give me a £2,000 annual income

Harvey Jones is now wondering whether to pour his entire Stocks and Shares ISA allowance into a single FTSE 100…

Read more »