Investors should consider buying this energy AIM stock, which is up 50% in the last year

The high risk/reward permutation can be applied to almost any energy. Alternative Investment Market (AIM) stock. Many over-promise only to fail.

Therefore, I adopt a bottom-up method of analysis to pick the winners in London’s youth market; financial condition of individual stock while to some extent reducing the focus on macroeconomic and market cycles.

Among the many AIM-listed energy stocks I have examined in this context, minnow Afentra (LSE: EEC) stands out. Its main offering includes a portfolio of non-operated, mid-life producing oil and gas assets in Africa that energy giants have withdrawn from.

The majority of these holdings (both onshore and offshore) are in Angola. These are viable hydrocarbon plays that are currently generating revenue. By the middle of this year, Afentra made a profit of $22.2 million (versus a loss of $3.1 million in the first half of 2023).

Despite the challenging macro climate, wider challenges in the energy sector and declines in oil prices, this fish has managed to survive thanks to a smart hedging strategy; that is, maintaining the majority of its purchases per barrel at a fixed and stable level through financial instruments to manage price volatility.

Operationally prudent

For example, according to the company’s latest update, it sold 1.68 million barrels of crude oil at an average price of $84 per barrel in the first three quarters of the year. “With the latest lift planned for Q4 2024, 70% protected by a base of $70 per barrel, the company is well positioned to continue its disciplined financial management and operational growth.” he continued.

Afentra is also a FTSE250 Caliber management for an AIM company. Ruled by the former Tulle Oil CEO and industry veteran Paul McDade. According to my conversations with McDade, Afentra puts operational prudence, transparency and maintaining a low debt profile at the heart of its operations, mindful of the negative perceptions often associated with AIM resource stocks.

Afentra, as of October 31 cash sources Net debt of $37.4 million and $4.6 million, “upcoming crude sales will further increase liquidity.” Future revenue stability is based on the company’s desire to double production capacity to 40,000 barrels per day within half a decade and add more barrels through more acquisitions.

Expectations and warnings

I believe Afentra has the potential to rise from its current 40p to 60p range to around 250p to 320p within five years. This is based on a calculation of four times projected current year-end fiscal revenue ($180 million) divided by the number of shares issued.

The company’s efforts to double its production by 2029 and the fact that it sells oil at an average price of $70 per barrel also seem to generally support the 4x revenue projection as the basis for the calculation.

Of course, fluctuations in foreign exchange rates and the strength of the dollar will also have an impact. If oil prices gradually fall further and faster towards the end of the current decade, Afentra’s earnings will decline accordingly. Planned production increases may not occur. Such factors will affect the company’s future share price.

But in my opinion, the potential rewards outweigh the risks of holding Afentra right now. The company seems to have medium to long-term potential and therefore I would be happy to add more shares to my portfolio.