Could this small-cap growth stock become the new “BP plc of Africa”?

Since the beginning of 2017, Victoria Oil & Gas plc (LSE: VOG) has shot to fame as one of AIM’s best-performing stocks. Year-to-date shares in the group are up 111% following the announcement by the company that it had made a good start to the year after the Bonaberi pipeline came on-stream last December. 

As well as the commissioning of the new pipeline, three new customers started taking gas from the company in December, adding around 500,000 scf/d in production.

Transformational deal

The opening of the Bonaberi pipeline has transformed Victoria’s outlook. January 2017 was a record month for gas sales from Victoria’s Logbaba field, which is 60% owned by the group’s local subsidiary Gaz du Cameroun. Gas sales from Logbaba rose 4.5% to 654m mscf for the quarter, while there was a 24% increase in gas sales of 3.56m mscf for the year. GDC is the only supplier of natural gas to Douala, Cameroon’s rapidly growing second city and prices have been agreed with customers at prices from $9/mmbtu to $16/mmbtu. Prices are not subject to regulation. 

These deals have given Victoria a strong base from which to grow from. For example, at the end of the fourth quarter, Victoria reported revenue for the three months to 31 December of $4.6m, down slightly from the figure of $4.7m reported for the third quarter but more importantly, the company reported a net cash balance of $1.3m at the end of the period. Overall cash reserves rose by $1.7m during the quarter to $15.8m. 

For the year ending 31 December 2017, City analysts are expecting the group to report revenues of $28.5m, virtually unchanged year-on-year. However, I believe these forecasts are substantially underestimating Victoria’s potential. Indeed, if the company added three new customers at the end of last year, and recorded record gas production during January, it’s not unreasonable to suggest that revenues could be noticeably high this year than they were for 2016. 

Looking to expand 

As well as Victoria’s existing presence within Cameroon, the company is now starting to look to expand both inside and outside the African nation. In a recent interview, Victoria’s chairman Kevin Foo noted that the firm sees plenty of opportunities to grow within Cameroon but the business also sees opportunities outside the country. With net cash of $1.3m, $16m of undrawn credit facilities and an established presence in Western Africa, it looks as if the group is primed for growth. 

Risks ahead 

Victoria may look like it’s on the up and up, but like all early stage growth companies, investors need to approach the business with caution. Operating in a frontier market like Cameroon is always going to be risky, and the oil & gas business is hardly known for its predictability. 

So, if you want to take a bite out of Victoria’s growth, it’s best to invest with a long term view and don’t bet the house. If the company becomes an African BP, the potential upside could be many multiples of the current price. This scenario is unlikely but not impossible that’s why a small speculative position may be the best way to play Victoria’s growth, at least until it’s a more established operator in Africa.