The next 12 months will be a trying time for struggling oil producer Afren (LSE: AFR). The group is struggling to remain solvent and a last-ditch recapitalisation plan will almost completely wipe out existing shareholders.
And unfortunately, even after the recapitalisation, debt will continue to be a problem for Afren.
Specifically, the company is only planning to convert 25% of its debt falling due during 2016, 2019 and 2020 into equity, with the remaining debt being reinstated and extended to 2019 and 2020 at an annual coupon of 9.1%. What’s more, the creation of the $200m super senior private placement notes and $321m of new high-yield notes will saddle the group with a hefty annual interest bill.
That said, Afren’s recapitalisation will provide the company with $300m in cash for immediate use. However, it’s unclear how long this emergency cash will last.
In particular, Afren has taken steps to reduce its capital spending, but is still planning to fork out $500m to maintain and upgrade its Nigerian oil projects this year. Moreover, the company’s income is being throttled by the low oil price. A key test for the company will come at the end of April, when a $50m debt payment falls due.
With all these factors weighing on the company, one thing is for sure: Afren’s new CEO has got his work cut out.
A new leader
After six months without a CEO, Afren has finally managed to bag a new manager. Alan Linn, one of Afren’s existing consultants, has agreed to take on the role of chief executive on completion of interim financing arrangements.
And Mr Linn seems to be a great catch for the ailing oil company. After a 15-year career with ExxonMobil, Linn has also spent time working for Cairn Energy and Tullow Oil.
Still, it remains to be seen if Mr Linn can return Afren to growth, although he certainly has enough experience for the task.
What’s next?
During the first week of April, Afren informed shareholders that the company was “making good progress on satisfying the relevant conditions precedent to the provision of the interim funding” and completion is expected “imminently”.
So, Afren’s shareholders should find out within the next week or two whether or not the company’s capital recapitalisation has taken place. After that, the group’s new CEO will have to get straight to work, cutting costs and selling assets to boost income but the odds are stacked against him. With a mountain of debt and unfavourable oil price, the next few months are going to be extremely difficult for Afren. There’s no guarantee that the company will every return to its former glory.