Another bombshell for Afren shareholders

The Nigerian focused and FTSE 250 oil explorer, Afren, seems to have a habit of releasing awful RNS’s of late. After the resources write down in Kurdistan a few weeks, which followed the controversy about illegal payments to the COO and CEO Osman Shahenshah and subsequent dismissal, today the company issued further bad news regarding its Capital Structure.

The shares dived as low as 5p valuing the entire business at around £50 million and are currently trading at just shy of 8p on the news that “In light of the significant dislocation in the industry and related financing markets resulting from the rapid decline in oil prices, the Board has been reviewing the funding and liquidity requirements of the business and seeking to address how it manages the overall leverage position of the Company. ”

The company is facing a cash crunch despite $235 million of cash at the end of 2014 as “Liquidity available to the Company is significantly lower as a result of restricted and segregated cash balances in place to address operational requirements.  The Company’s near term cash flow is also impacted by capital expenditure incurred in late 2014 before operational changes had been implemented to adapt to the current lower oil price environment. As previously announced, Afren has initiated negotiations with the lenders of the US$300m Ebok debt facility with a view to obtaining a deferral of the US$50m amortisation payment due on 31 January 2015. In addition, the Board is considering whether to utilise a 30 day grace period under its 2016 bonds with respect to US$15m of interest due on 1 February 2015 while the review of the capital structure and funding alternatives is completed. These actions are being taken to protect the immediate liquidity position of the Company while it seeks funding to address its additional requirements.  ”

The potential merger/takeover by Seplat continues with the bid deadline the 30th January and with Afren looking about as distressed as you can get, the company’s shareholders will be forced to take a low ball offer if an offer comes at all. Certainly for Seplat they have the opportunity to pick up some good assets at near enough fire sale prices. If Seplat doesn’t come good the alternative doesn’t look good with the prospect of a pretty horrific rights issue if the bond holders do not agree to an Enquest style debt restructuring. Today’s news certainly calls in question the remaining management of the company and how they have let the plunge in the oil price leave the company on the brink of collapse. A “white knight” bid by Seplat or another cash rich company would open a welcome expulsion of the old Afren guard.

Though Afren has a premium FTSE 250 listing the recent shenanigans has made it feel like the worst type of oil explorer on AIM. Just when you think the news can’t get any worse, the company disappoints yet again. Let’s see what happens with Seplat since for equity holders right now it seems the only life line to rescue the battered share price. Former Nigerian defence minister General Theophilus Danjuma, who built a stake of 7.1% in Afren through South Atlantic Petroleum (SAPetro) in late 2014 at over £1 a share must be feeling pretty annoyed right now. Perhaps SAPetro could be thinking of some corporate action of its own at these levels as much as anything to protect its existing investment? A binary bet for Afren shareholders now with plenty of hopes resting on Seplat and for me personally a bad investment even at the recent lows. For those taking a punt at these low levels, they may be richly rewarded come the bid deadline but of course this does not come without some significant risks.

Contrarian Investor UK

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