As Afren Plc Delays Yet Another Payment To Bondholders, Should You Give Up And Buy Tullow Oil plc?

Struggling oil minnow Afren (LSE: AFR) has announced today that it intends to delay yet another interest payment to bondholders. Specifically, Afren is planning to use a 30-day grace period to delay the payment of $11.9m interest on the company’s 2020 bonds. 

The company says that this interest payment has been put on hold “pending the completion” of the company’s recapitalisation process. 

Adding insult to injury, Afren anticipates it will not pay the interest due on the 2020 bonds “at the expiry of this grace period”.

Afren has already entered formal default after the non-payment of $12.8m worth of interest on its 2019 bonds. So this announcement shouldn’t come as a surprise.

But it seems as if bondholders have plenty of patience. Afren has received assurances from a committee of its creditors that they have no “intention to take enforcement action” following the company’s decision to postpone interest payments.

New depths 

Today’s announcement from Afren has pushed the company’s shares close to their all-time low. And at the current price of 2.47, Afren’s losses over the past 12 months have reached a staggering 98.4%. 

Unfortunately, things only seem to be getting worse for the company. First-quarter revenue slumped 52%. Cash flow before movements in working capital slipped by 65% year on year, and net debt increased by around $100m during the first quarter. 

Further, Afren’s full-year production is expected to fall in the range of 23,000 to 32,000 barrels per day — significantly below first-quarter production of 36,000 bopd.

It seems as if nothing is going right for Afren. Even if the company completes its recapitalisation plan, it will take years to return to growth and the group could find it hard to shake off its poor reputation and mountainous debt pile. 

Stronger pick

Tullow Oil’s (LSE: TLW) shares have declined by 54% during the past 12 months. However, unlike Afren, Tullow is well positioned to ride out volatility in the oil market and profit when prices push higher. 

For example, at the end of 2014 Tullow’s net debt to shareholder equity ratio stood at 78%. At the end of full-year 2014 Afren’s net debt to equity ratio totaled 685%. 

Moreover, lenders seem happy to increase the amount of credit available to Tullow.

Based on the quality of Tullow’s asset portfolio, along with the company’s fiscal prudence and cash-generative assets, the company secured an additional $450m of capital under its existing credit facilities earlier this year. 

Ten problems 

Tullow’s finances are stronger than Afren’s, but Tullow does have problems of its own. The biggest challenge currently facing Tullow is the border dispute between Ghana and the Ivory Coast, which has impacted the company’s Ten oil project. 

Tullow owns just under half of the £3.5bn Ten project and plans to spend $1bn developing the prospect this year. 

However, as a result of the border dispute, drilling around Ten has been suspended and the ban could last until 2017. Nevertheless, oil production from Ten is still on-track to begin during 2016. Initial production is expected to be somewhere in the region of 80,000/boed, boosting Tullow’s production by around 50% per annum.

Overall, Tullow’s strong balance sheet and output growth potential makes the company a better pick than Afren.