Afren updated us this morning with a review of its capital structure — and it’s not pretty!
The company was famously dogged by corrupt management, but once the guys at the top were kicked out for taking unauthorised payments, things looked a whole lot more optimistic — or they would have done, had Afren not been hit by the plunging price of oil.
Although the price has picked up since its January lows, oil at around $60 a barrel doesn’t help any producers. And it’s especially painful for small explorers like Afren, with most of its assets in Nigeria, and the firm’s earnings are expected to crash to almost nothing this year.
Price crash
The share price has, unsurprisingly, plummeted, and at around the 10p mark it’s down 95% over the past 12 months. But after this morning’s news, it’s back up 17.5%. Why?
Afren is technically in default on its debts, but its lenders have not pulled the rug from under it yet. In fact, the lenders of Afren’s Ebok debt facility have agreed to further defer a $50m amortisation payment that had been due at the end of January, and it’s now been rescheduled for 31 March.
Afren was also due to pay $15m in bond interest on 1 February, but it is further extending a grace period on that payment while it continues its review of its capital structure and funding requirements. You might all see this as merely delaying the inevitable, so why has the market reacted favourably?
It would be easy enough for Afren’s creditors to force it into bankruptcy and try to salvage as much as they can from its assets, but these recent moves suggest they’re still reluctant to do that and are prepared to hold out and see if there’s any kind of rescue package that can be put together. The reason seems obvious — if you were given Afren to strip, would you relish your chances of getting much money from selling off oil assets that are barely profitable at a time when everyone else is struggling to do the same?
A hope of survival
It looks like the lenders are hoping for a better outcome by helping with a refinance package that would at least keep Afren ticking along until oil prices recover a little and its balance sheet is looking a bit healthier.
Afren said today that it is “having discussions with its other stakeholders and new third party investors regarding recapitalising the company“, and that’s likely to come as a mix of debt and equity — lenders will hopefully offer more, while at the same time a new stock issue would raise new capital. But equity would have to be at a discount, and how much would be left for existing shareholders is anybody’s guess.
Not with my bargepole
If you’re a recovery expert and you understand how to make money buying shares of a technically insolvent company that’s desperately looking for the money to survive, then I applaud you if you have a go with Afren. But I still think you’re mad.