Investors should consider buying this Energy AIM stock, which is up 50% over the past year

A high risk-reward permutation is applicable to virtually any energy Alternative investment market (AIM) share. Many promise too much, only to come to nothing.

Therefore, to pick winners in the London junior market, I use bottom-up analysis – meaning I focus on the financials of individual stocks and reduce the focus on macroeconomic and market cycles to some extent.

Among the many AIM-listed energy stocks I have looked at with this in mind is Minnow Afentra (LSE: AET) stands out. Its core offering includes a portfolio of unoperated, middle-aged oil and gas production facilities in Africa from which energy companies have withdrawn.

The majority of these holdings – both onshore and offshore – are located in Angola. These are viable hydrocarbon deposits that are currently generating revenue. At mid-year, Afentra made a profit of $22.2 million (versus a loss of $3.1 million in the first half of 2023).

Despite a difficult macro-climate, broader energy sector challenges and falling oil prices, this minnow has been able to hold its own thanks to a smart hedging strategy, i.e.

Operationally prudent

For example, 1.68 million barrels of crude oil were sold at an average price of $84 per barrel in the first three quarters of the year, according to the company’s latest update. “With final production scheduled for the fourth quarter of 2024 and 70% hedged with a floor of $70 per barrel, the Company is well positioned to continue its disciplined financial management and operational growth“, it continues.

Afentra also boasts one thing FTSE 250 Caliber management for an AIM company. It is led by former Tullow oil CEO and industry veteran Paul McDade. Based on my discussions with McDade, Afentra places operational prudence, transparency and maintaining a low debt profile at the core of its operations and is aware of the negative perceptions often associated with AIM resource holdings.

As of October 31, Afentra has cash of $37.4 million and net debt of $4.6 million.while upcoming crude oil sales will further bolster liquidity” Future earnings stability is based on the company’s desire to double its production capacity to 40,000 barrels per day within half a decade and to add more barrels through further acquisitions.

Prospects and reservations

I believe Afentra may have room to rise 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 year-end financial revenue ($180 million) divided by the number of shares it has outstanding.

The company’s efforts to double its production by 2029 and sell oil at an average price of $70 per barrel also appear to broadly support a 4x revenue forecast as a basis for the calculation.

Of course, currency fluctuations and the strength of the dollar play a role. If oil prices fall further and faster by the end of the current decade, Afentra’s profits would also fall. Planned production increases may not be realized. Such factors will affect the future stock price of the company.

However, for me, the potential benefits currently outweigh the risks associated with holding Afentra. The company seems to have medium to long-term potential and therefore I would like to add more shares of this company to my portfolio.