Shares in Afren (LSE: AFR) are surging today following the news that the company has received a “highly preliminary approach” from Nigeria’s SEPLAT Petroleum Development Company (LSE: SEPL), or Seplat for short.
The approach comes after a tough year for Afren, suffering from the falling price of Brent crude, which has fallen by more than 40% since mid-June. Nevertheless, bid speculation has been rife for some time now as Seplat has been steadily building a stake in Afren over the past few months.
News releases show that since the end of September, Seplat has acquired just over 7% of Afren.
However, even though Seplat has approached Afren, Afren’s press release on the matter, released earlier today, makes it quite clear that:
There can be no certainty that an offer will be made or as to the terms of any offer.
So there’s no indication of how much Seplat will offer for Afren. Additionally, as of yet there has been no comment on whether Afren’s shareholders will be offered cash or stock for their holdings. Under UK takeover rules, Seplat has until 5.00 pm on 19 January 2015 to either announce a firm intention to make an offer for Afren, or announce that it does not intend to make an offer for Afren.
Flush with cash
Afren used to be one of London’s oil darlings with a market capitalisation of £1.8bn at the beginning of 2014. But the company has recently been rocked by a series of scandals and is currently without a CEO. Afren was forced to fire its long-standing chief executive, Osman Shaheshah after he secretly channelled $17m out of the company. Several other members of the management team have also been asked to leave.
These troubles, combined with the falling price of oil have weighed heavily on Afren’s shares. The company’s market value fell to a low of £370m last week.
Seplat on the other hand has been biding its time, waiting to make a move and is sitting on a $500m cash pile after listing in London earlier this year.
Attracting attention
Seplat has certainly attracted plenty of attention since coming to market. The company has stated that it is able to break-even with oil prices as low as $30 a barrel and many oil majors have begun to take a real interest in the company’s businesses model.
Unfortunately, oil producers like Seplat, which operate within Nigeria have to grapple with theft and corruption in the Niger Delta. Seplat believes that without this theft, onshore costs could be as low as $10/bbl. Over the long-term the company has the potential to lower its cost of production down to this level, although right now the group is concentrating on growth.
City analysts believe that Seplat is set to yield 6.7% next year and currently trades at a forward P/E of 2.4.
Time to buy?
So, should you buy Afren or Seplat following today’s news? Well, as Afren noted within this morning’s press release, there’s no guarantee that a deal between the two companies will go ahead and for this reason alone I would stay away.