Shares in Afren (LSE: AFR) opened down by more than 10% this morning, after the firm confirmed a Sky News report that it is taking advice on restructuring its finances, if a hoped-for takeover bid from fellow Nigerian operator Seplat fails to materialise.
Most shocking, to me, was the firm’s admission that it is seeking to delay a $50m payment due at the end of January.
Should we be surprised?
I suspect many Afren shareholders will be a little surprised at this news.
Just four months ago, in October, Afren reported that it had generated net cash from operating activities of $454m during the third quarter of this year, and told investors it had $266m of cash on hand.
Although the falling price of oil means that revenues since October will have fallen steadily, it still seems a bit surprising that Afren has reached the point where it is potentially unable to meet a $50m repayment and is being forced to negotiate a refinancing plan with its lenders.
I was wrong
I have been bullish on Afren in the past — in December, I suggested that Afren shares “looked cheap” and could be a profitable recovery buy.
Clearly I was wrong — I underestimated the firm’s problems. First, there was the unauthorised payment scandal that resulted in the sacking of the firm’s CEO and COO.
Earlier this month, Afren eliminated 190m barrels of proven reserves and 1,000m barrels of contingent resources from its Barda Rash field in Kurdistan.
Now we’ve discovered that Afren is strapped for cash and on the verge of defaulting on a debt repayment.
How many more skeletons does Afren have in its closet?
What about the takeover?
The only hope on the horizon for Afren shareholders at the moment is that Seplat will decide to make a bid for the firm. The deadline for Seplat to make an offer was extended until 30 January on Monday.
Unfortunately, Afren’s negotiating position is now even weaker than it was: now that Afren’s financial problems are public knowledge, shareholders may be inclined to accept a lower bid than they would have done previously.
Lucky buyers in today’s market may still make a quick profit if a bid comes through from Seplat. I’d hang on a little longer if I did own Afren shares, but questions about the quality of Afren’s finances and its assets mean that it’s too risky for me to buy.
Of course, I may yet be proved spectacularly wrong — investing in troubled commodity stocks can sometimes be extremely profitable.