One undervalued African energy company

When I think of energy, the usual suspects come to mind – the United States, Russia, and of course Saudi Arabia. However, the oft-overlooked continent of Africa has some prospects for those willing to some digging. Here’s one that look interesting.

Orca Energy (ORC.B.V)

This is a small cap natural gas producer that operates in Tanzania. It expects to produce roughly 95MMcf of gas for distribution to the Tanzanian market in 2023. Its operations includes 8 gas wells that have produced more than 500Bcf of gas since 2004.

Additionally, they oversee a processing plant on Songo Songo island. Processed gas is carried to Dar es Salaam via two pipelines. Once there it mainly is used in power generation, followed by industrial use and in a pilot program involving compressed natural gas vehicles.

To energy producers, interest in Tanzania is increasing because of its burgeoning natural gas reserves. Current estimates suggest there are 57 trillion cubic feet of gas reserves in Tanzania. So far only about 30% of the area around Lindi, Tanzania has been explored. The government is working with producers to further explore and develop the region. Notably, the construction of an LNG port with Shell, Exxon, Equinor and others is in advanced talks.

Legal disputes cloud Orca’s prospects

On a more negative note, Orca has been involved in a legal dispute with a company called Swala Oil and Gas. Around 2017, they negotiated a deal where Swala would purchase a 7.9% stake in a subsidiary of Orca that manages the Songo Songo gas fields.

According to the regulatory body that oversees transactions of Tanzanian government interest, the FCC, the deal amounted to a takeover of the company. They killed the deal and finger-pointing between Swala and Orca began.

The complex number of subsidiaries between the two companies were all fined by the FCC. Orca’s amount was just over $3 million dollars. Orca bought back most of its Swala-owned shares in what appears to be a discount. The original deal amounted to $21 million. Swala had paid 17 but 4 remained before the deal died. Apparently, Orca bought the shares back for roughly $7 million and is still expecting to be reimbursed by the now bankrupt Swala for the remaining $4 million.

Outside of this deal-gone-bad, Orca is facing the issue of declining well production. The process for exploring and developing new wells is underway but regulatory approval is still needed. Also, issues common to working in Africa are impeding progress like securing timely 3D seismic readings of its gas field.

Orca looks undervalued

On the valuation front the company appears to be trading at a discount. The price/book ratio is 0.76. It has $136 million in cash and $59 million in long-term debt. Using Peter Lynch’s cash position calculation there’s $3.87/share in cash and at the time of this writing shares are trading at $4.71/share. That’s a lot cash.

What the company does with that cash is another question. Clearly, there will be more expenses in the future with well declines forcing the company to develop new sources of gas. The dividend is $0.10/share which is an 8.49% yield. At 19 million shares outstanding and $3.87/share in cash on the balance sheet, the dividend should be safe. The EV/FCF ratio is at 0.4227 and its FCF yield is just over 64%.

In September 2023, Ewen Denning the COO bought 3400 shares at $5.00. The company has a major shareholder Shaymar Ltd which owns most of the class A shares and 16% of the class B shares. Shaymar is a trust setup by Orca’s founder, David Lyons. He was brother to current CEO Jay Lyons before passing away in 2018.

The family has been in the oil and gas business for generations. Their father, J. Verne Lyons, was a pioneer in developing Alberta’s oil and gas industry. David sold a previous African energy venture, Pan-Ocean, for $1.6 billion to Addax Energy in 2006.

What will move Orca’s share price higher? Recent events suggest the idea of a takeover or merger is off the table. Perhaps this is why the shares are so cheap. To small-time investors like me, who are willing to wait and aren’t risking their fortunes on the expectation of a takeover, Orca is a bargain.