Afren (LSE: AFR) and Xcite Energy (LSE: XEL) have risen significantly in the last few days of trading based on little evidence that they are undervalued, and more on the backing that they have received from their lenders.
Before investing in either stock, you should consider that a highly dilutive rights issue is still a threat for Afren shareholders, while Xcite Energy remains a highly speculative bet, based on its financials.
Xcite Gets Going
Xcite closed at 38p on Friday, which means the stock is now in positive territory for the year (+4%), and some 54% above the 52-week low of 24.7p that it hit at the end of March. In spite of a one-month performance that reads +42%, though, its equity valuation is down 40% over the last 12 months of trading (as of the end of trade 1 May).
The elasticity of its stock price to oil prices is less important than its own financials and funding requirements, I’d argue, however.
In its annual results, Xcite said that it had secured new debt financing of “$135m of secured 12% coupon bonds, with repayment of the existing $80m unsecured 12.5% loan notes.” Cash balance at year-end stood at £32.5m.
Based on its projected cash burn rate, Xcite should be safe for 14 to 18 months at the minimum, according to my estimates.
As Xcite acknowledges, the oil industry is currently facing major challenges, but Xcite remains optimistic that it “will successfully transition through the next phase” of its journey towards development of its benchmark Bentley oil field in the North Sea.
It has secured partnerships with Statoil, Shell and EnQuest, but rising net debt — which has become only marginally cheaper than before but is now secured against its assets — and no revenue aren’t an ideal combination for value investors. As a result, its enterprise value (market cap plus net debt) is almost double its £118m market cap.
Afren: When Dilution Comes, It Will Hurt
Afren has been one of the most debated investment cases in the oil sector in recent months. I think there’s risk in Afren, and I have no doubt that dilution will be very painful for existing shareholders, but I see value in its producing asset base.
Its stock has been hovering around 3p ever since it became apparent that Afren would not be able to operate as a going concern without a significant equity injection earlier this year.
The shares rose 11% last week, but they were up more than 20% on Friday as it emerged that it had secured $255m of debt funding from bondholders.
Its results were also released on Friday and came broadly in line with expectations: it reported a net loss of $1.6bn for the year (vs $516m one year earlier), and that was due to a 40% drop in revenue to about $950m from $1.6bn, which was widely expected, as well as large impairment charges.
Its stock is down 92% this year, and 97% over the last 12 months. The outcome of a comprehensive recap is expected in the next 90 days, and may not be as bad as many expect it to be for existing shareholders…
