In a shock move, shares in Afren (LSE: AFR) were suspended this morning after the firm said that it was “unable to assess accurately its financial position”.
In this morning’s update, Afren said that “an ongoing review of the business plan” had revealed that “near-term oil production is likely to be materially lower” than the assumptions included in March’s restructuring plan.
It does seem pretty shocking that this has only come to light after the restructuring plan was agreed. I imagine the reason for this is that the firm’s new management, led by chief executive Alan Linn, is still working its way through the figures and projections provided by the previous management.
However, bondholders who have supported the restructuring are likely to be pretty unhappy at this development.
Less than two months ago, on 29 May, Afren said Q1 production of 36,035 bopd was “above” full-year guidance and “in line with expectations”. What’s gone wrong since then?
Afren doesn’t give any details of the likely shortfall in production, but the firm’s comments suggest to me that the financial projections on which the restructuring plan was based may now be invalid.
Out of cash
Afren says that it will be “further engaging” with the ad-hoc committee of bondholders regarding its request for an additional $30m of bridging loans. The firm also says that it will be engaging with stakeholders to discuss the implications of today’s news on the proposed restructuring.
This suggests to me that the firm may not have enough cash to continue operating between now and 5 August, when new Senior Notes are expected to be issued to provide the firm with fresh longer-term funding.
Today’s statement also suggests to me that there may be a risk that the funds provided for by the restructuring plan will no longer be enough to meet Afren’s needs and prevent it from falling into administration.
A new restructuring plan may now be required.
The end of the line?
The outlook for shareholders was already uncertain at best.
Afren shares have fallen by 96% since the start of the year and the future of the company has clearly been in doubt.
Today’s news makes this picture much, much worse.
Even if shareholders vote to approve the restructuring plan at the EGM on 24 July 2015, this may not be enough. Further refinancing could be required, and bondholders may decide to throw in the towel and force Afren to sell its assets.
The Afren shareholder group (ASOG) that has been opposing the restructuring plan also now finds itself in an uncertain position. If the restructuring needs to be renegotiated, the consequences of a ‘no’ vote are likely to change. It’s possible that the planned EGM may be delayed until a different set of proposals are agreed.
Even if trading is resumed, Afren’s share price is likely to fall sharply. There is a real risk that Afren shares will remain suspended and eventually be delisted, making it impossible for shareholders to sell.
My view is that Afren shares are now likely to be worth nothing and should be sold if possible. For now, there is nothing that shareholders can do except wait.
However, today’s news highlights the need for investors to ensure their portfolios are properly diversified.