Embattled oil explorers Afren (LSE: AFR) and Enquest (LSE: ENQ) have enjoyed a rare turnaround in recent days on the back of a steady oil price and positive newsflow. Afren has paused for breath in midweek business but is still trading 170% higher from last week’s record lows of 4.2p per share. Meanwhile Enquest continues to rise and was recently 1.3% higher on the day, leading many to believe that prices may finally be on the cusp of a strong turnaround.
Afren breathes again… For now
I have written in some depth about both companies in recent times and must confess that I do not share the market’s current confidence, unfortunately.
Afren has received a bump after fossil fuel peer Seplat (LSE: SEPL) was granted an extra 14 days by the UK Takeover Panel to make a formal offer for the company. This is the second such extension after it had made an initial approach to acquire Afren back in December.
But quite why Seplat would make an offer for the company right now, rather than wait for the company to hit the rocks and mop up its promising asset base in East Africa and Madagascar for a song, remains a huge question.
Make no mistake: Afren remains on the cusp of going out of business despite Friday’s last-ditch effort to plug its colossal financial holes. The firm’s post-trading update advised that its lenders had agreed to defer payment on a $50m amortisation payment, initially due on 31 January, by a month. As well, Afren also plans to make use of a 30-day grace period for a 2016 bond that required a $15m interest payment to be made by 1 February.
But the oil explorer continues to creak under its gigantic debt pile and, with cash disappearing at an alarming rate, is likely to remain on life support until it either finally keels over or its industry rival puts in an offer. Given the precarious state of the firm, I believe that Seplat can sit back and wait for the share price to erode further before coming to the rescue.
Enquest’s bounce set to stall
Meanwhile, Enquest has enjoyed a stronger couple of days after it announced a deal to purchase interests in the Didon oil field in Tunisia had fallen through, resulting in the return of $23m to the oil explorer.
The business accordingly revised down its production guidance for this year by 372 barrels of the black stuff per day, to 28,267 barrels. But cash is king in the current market climate, and the news provides a welcome boost to Enquest’s balance sheet as well as reducing the capex burden.
But like Afren, I believe that recent developments are a mere distraction from the bigger picture, and that investors should expect Enquest to resume its downtrend again soon. With oil prices expected to remain in the doldrums for some time yet — indeed, forecasts for Brent to slump to $20 per barrel are still circulating — doubts over the economic viability of Enquest’s mammoth Amla/Galia project in the North Sea, due to come on stream next year, are likely to intensify.