After all, and despite having huge debts that it simply could not service, in recent weeks there had been some hope among investors that under the terms of a new financial restructuring package, the company could continue and begin to mount a comeback. However, with production levels falling dramatically and the company being unable to reach a new agreement with its creditors, Afren’s time was up and, as a result, its investors walk away with a 100% loss.

Clearly, this is hugely disappointing for investors in Afren. Certainly, companies going bust is nothing new and, as investors, we accept this risk in order to gain access to the considerable rewards that shares can also offer. And, in Afren’s case, the main cause of its woes was an external factor (the collapse in the price of oil) which prompted the risks it had taken with regard to large levels of debt to come home to roost. In other words, it took a risk in leveraging its balance sheet and, with revenue having fallen, became unviable as a business.

Therefore, the question must be asked: if it can happen to Afren, could it happen to other oil explorers and producers?

Without doubt, the answer to that question is ‘yes’. And, on the face of it, the outlook for Iraq/Kurdistan-focused oil producer Gulf Keystone Petroleum (LSE: GKP) is not good. That’s because, like Afren, it has a considerable amount of debt on its balance sheet and, more importantly, it is still not receiving the monies owed to it for oil sales from the Kurdistan Regional Government (KRG). Certainly, the KRG has stated that it intends to commence a regular payment cycle from next month, but details on exactly how much cash this will mean for Gulf Keystone Petroleum remains unclear.

With the KRG expecting an increase in production in 2016, it has stated that it intends to increase payments moving forward. While this is encouraging news for Gulf Keystone Petroleum, hopes for cash inflows have been built up before and, as yet, the company is still waiting for a backlog of payments. In fact, to such an extent that it is now selling oil domestically at a cut price.

Undoubtedly, Gulf Keystone Petroleum has a hugely appealing asset base that, in the long run, has the potential to deliver vast levels of profit. The problems it faces, however, are also considerable. As well as a lack of cash receipts for oil that has already been produced, it faces the prospect of a continued low oil price as well as the potential for increased political instability in a region that remains a conflict zone.

As such, and while Gulf Keystone Petroleum may not follow Afren into administration, its risk/reward ratio appears to be unfavourable, thereby making it a stock to avoid at the present time.

The post Will Gulf Keystone Petroleum Limited Follow Afren Plc Into Administration? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The company announced that its latest discussions with its lenders “have failed to deliver support for a revised refinancing and restructuring proposal that would result in Afren Plc being able to pay its debts as they fall due. As a result, the Board has taken steps to put Afren Plc into administration … The relevant documentation will be filed at Court during the course of the day”.

The immediate precursor to the final nail in the coffin was materially lower near-term production and delays in project implementation announced on 15 July, meaning that production, timing and pricing assumptions used in a restructuring plan announced on 19 June went out of the window.

In truth, though, the writing had been on the wall for some time. Certainly, from 13 February, when Afren rejected a takeover approach, because it was not “n terms satisfactory to all relevant stakeholders in the Company, including the indicated value being significantly below the aggregate value of the debt of the Company”.

I warned readers at the time not to mistake the word “stakeholders” for “shareholders”, and that, due to Afren’s high level of debt, it was almost inevitable that shareholders would be massively diluted with a debt-for-equity swap at a few pence per share at best (the shares were then trading at 10p). It was all downhill from there, as power shifted increasingly from shareholders to debt holders.

Today’s announcement of administration for the plc, amounts to the debt holders — secured creditors — trying to preserving what value they can for themselves. Afren said that none of the group’s subsidiaries has appointed administrators and efforts are being made to continue the operating businesses. Ultimately, any value realised will go to the secured creditors. Equity has been wiped out.

Lessons

As part-owners of businesses, we shareholders tend to think of them as our companies. Indeed, the great Warren Buffett has said that is exactly how we should view ourselves. Of course, in thinking of ourselves as part-owners, we can become emotionally attached to our investment in a way that lenders don’t. Banks and bondholders don’t have the same attachment, and tend to be cold and ruthless if prospects for the cash they’ve loaned a company turn sour.

As such, equity investors should pay a lot of attention to a company’s level of borrowings, rates of interest and maturity dates before buying shares. Companies in some industries can carry a high level of debt without too much risk; for example, regulated utilities. Oil companies, though, can be extremely vulnerable: an oil price crash, asset writedowns and cash flow problems can soon put a company in dire straits.

As shareholders, we should perhaps also be rather more ruthless in recognising when the equity in businesses of which we are part-owners is in a downward spiral and when power is shifting to debt holders. Taking a loss is never easy, but salvaging something from our investment — as when Afren’s shares were at 10p, for example — at least leaves us with some capital to redeploy in a hopefully more successful venture.

The post All Over For Shareholders As Afren Plc Is Put Into Administration appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

In the case of Quindell, an investigation by the financial regulator, the FCA, into the company’s communications in recent years prompted Quindell to seek a temporary suspension of its shares on 24 June. Clearly, this is bad news for the company and, while the FCA could find that the company followed all applicable rules, the possibility of a negative outcome is likely to hurt investor sentiment towards the company in the meantime. And, with Quindell also failing to reports its full-year results on-time, it appears as though the situation at the company remains rather less than perfectly smooth.

Of course, Quindell could prove to be a strong long term performer. It has new board members and is apparently seeking to become a specialised telematics and insurance technology business. However, the challenges it faces could hold back investor sentiment and, even if its shares do resume trading in the near future, prudent investors may wish to watch, rather than buy – at least until the outlook appears steadier for Quindell.

Meanwhile, Afren’s shares have been suspended since 15 July amid concern surrounding its financial standing. In fact, Afren admitted that it was unable to accurately assess its financial position and that its near-term production levels would be materially below previous guidance. This was despite a recent restructuring plan being agreed with the company’s creditors and, while Afren is said to be further engaging with them in the hope of raising additional capital, its future seems to be rather bleak.

Of course, the company has been hit by a falling oil price and, while its asset base has always been relatively impressive, it appears as though a balance sheet containing too much debt may lead to its downfall. And, with interest rates only likely to go one way over the medium to long term and the oil price slipping back below $50 per barrel in recent weeks, even if its shares resume trading there appear to be far better options within the oil sector.

One stock that is not suspended at the present time and which is available for purchase is BowLeven (LSE: BLVN). Unlike Quindell and Afren, its recent news flow has been positive, with the company announcing the completion of drilling in the Zingana exploration well in Cameroon and reporting that it has found hydrocarbons in the reservoirs that were targeted. This is highly encouraging and caused a short term boost in BowLeven’s share price, although it remains 15% down since the turn of the year – largely due to a weak oil price.

Looking ahead, further positive news flow could lie ahead, with BowLeven set to commence drilling on the second well in the programme. And, with its shares currently trading on a price to book ratio of just 0.22, it appears to offer a wide margin of safety and considerable capital gain potential. Certainly, it is likely to be volatile, but could be worth buying for the long term.

The post Is It Safe To Buy Quindell PLC, Afren Plc And BowLeven PLC? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The restructuring plan that the troubled oil explorer had in place looked likely to save the company. Though it would hand the bulk of the equity over to its creditors and leave very little for existing shareholders, it was almost certainly the best deal they were going to get — even though a last-minute rebellion could possibly have thwarted it.

But even that deal is surely back up in the air again now, after Afren shocked the markets on 15 July by announcing that a review of its business had revealed that “near-term oil production is likely to be materially lower” than estimates upon which the restructuring plan was based. The shares were suspended on the day at 1.785p, down almost 99% over the previous 12 months. So would the rescue deal actually happen?

Vote delayed

It’s looking a lot less likely after the company’s latest missive, delivered on 21 July after markets had closed. The upcoming General Meeting scheduled for 24 July and its Scheme Meeting scheduled for 29 July have been postponed until further notice, as Afren needs to work out the full horrors of its production prospects and what they’ll mean for the bottom line.

One thing for sure is that there’s a “requirement for further significant funding” with the company telling us that the postponement “will allow Afren to finalise the review and engage with the relevant stakeholders to discuss the implications of the revised assumptions on the restructuring“.

Given that Afren is still “unable to assess accurately its financial position and inform the market accordingly“, it comes as no surprise that its shares are to remain suspended.

So far, Afren has been unable to offer any updated estimates for production, and that’s really quite shocking so soon after its upbeat first-quarter production boasts — as recently as 29 May, the firm was telling us of “average net production at 36,035 bopd in line with expectations to meet our guidance range for 2015, averaging 23,000 – 32,000 bopd“. It’s hard to understand what could have gone so horribly awry in such a short time, or how the company could have got it so badly wrong in May.

Nothing left

Afren is currently negotiating a short-tern loan of $30m to keep it going at least for a while, but whether it can produce an updated restructuring deal that its lenders will accept is very much up in the air again now — both in terms of the ultimate ownership of the company and the timescale of any possible rescue plan. We’ll need to get the updated production guidance, but we surely can’t be far away from the possibility that bankruptcy and a sale of assets would provide a better financial deal.

Whatever happens, there surely is nothing left for existing shareholders now.

The post The End Is Surely Nigh For Afren Plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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.

The post Afren Plc Shares Suspended: Is This The End For Shareholders? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Similarly, there is relatively little discussion of the idea of selling a good stock for an even better stock. Certainly, you may be happy with your portfolio and believe that it can outperform the index (and hopefully it does). But, there could be other stocks that are an even better place to invest, with your capital therefore not being deployed as efficiently or as effectively as it could be.

Clear Examples

Clearly, when considering opportunity costs and the efficient allocation of capital, Gulf Keystone Petroleum (LSE: GSK) (NASDAQOTH: GFKSY.US) and Afren (LSE: AFR) have been hugely poor places to invest in the last year. That’s because their share prices have slumped by 65% and 98% respectively in the last twelve months, with a declining oil price exacerbating problems that have led to the two companies facing hugely uncertain futures.

For example, in the case of Gulf Keystone Petroleum, its operations have thus far not been affected by the conflict in Iraq, with it producing over 40,000 barrels of oil per day. However, and despite a cash windfall recently, a permanent solution for regular payment for the oil it produces seems to be no nearer. This situation has been in place for a number of months and, as a consequence, the company’s financial outlook has been called into question, which has caused investor sentiment to decline.

Meanwhile, Afren’s financial outlook is also hugely troubling. Its debts are weighing the company down and, while it is in the process of restructuring its debts, a lack of working capital as well as various claims against the company mean that even if it does give itself some breathing space, Afren’s medium to long term future looks to be hugely challenging. And, as with Gulf Keystone, little help from the oil price should be anticipated, since it is expected that we are now in a ‘new normal’ period of sub-$60 oil.

The Wider Sector

Of course, if the situation for the entire oil sector were the same, then it could be argued that sticking with Gulf Keystone and Afren is a good move. However, it is not. There are a number of hugely profitable, diversified oil stocks with sound balance sheets, strong cash flow and, crucially, wide margins of safety that offer far more scope for capital gains than either Gulf Keystone or Afren.

Furthermore, they come with less risk, which makes the opportunity cost of investing in Gulf Keystone and Afren appear to be significant. As a result, selling Gulf Keystone and Afren and investing elsewhere within the oil sector could prove to be a sound move – even if it does mean crystallising vast losses in the meantime.

The post Is It Time To Ditch Gulf Keystone Petroleum Limited And Afren Plc? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The rationale behind this approach serves to make sure that I don’t lose sight of any companies that interest me, and help me to gauge whether my analysis has been accurate, or otherwise.

So while I haven’t directly compared Afren and Amerisur before, I felt like now was as good a time as ever, especially as both companies have released news recently.

Afren – Debt Becomes Her…

The last time I wrote about this company, the shares were trading at nearly double the price that they are currently. Whilst the shares remain volatile, I would urge caution for any investor who thinks that they are currently cheap – here’s three reasons why:

• Debt – if anything can kill a company, it is debt. Sadly, Afren has no shortage of it. As we head towards the company restructuring, and assuming that the open offer is taken up in full, the company will still have well in excess of £1 billion pounds of debt. Rather unsurprisingly, the bondholders are not giving Afren their best rate, either, with the 2019 and 2020 loan notes yielding over 9%. Shareholders in my view are currently at the mercy of the bondholders, and bondholders are not known for their generosity! This is currently strangling the company; sadly, I expect the situation to get worse.
• Known unknowns – additionally, the company tells us that there is a number of claims against the company. There is one for over $104 million from West African Ventures in termination and cancellation fees, costs, losses and expenses under oil services contracts. Another by Lion Petroleum for US$10 million in damages plus costs in respect of certain breaches of the JOA signed between East African Exploration (Kenya) Limited and Lion Petroleum in respect of Block 1, Kenya. Finally, there is another with Amni, where the potential cost cannot be quantified.
• Working Capital – in the prospectus, the company tells investors that it doesn’t believe that it has enough working capital for twelve months of operations.

Any one of the above issues should make investors nervous, especially as they are being asked to hand over more cash under the open offer.

Amerisur – No Longer A Pipe Dream…

With a market cap of around £400 million, Amerisur is the 559th largest company in the UK. It is an independent oil and gas production and exploration company focused on South America. It owns assets in Colombia and Paraguay, where it operates and holds a 100% working interest in the Platanillo block in Colombia. The 11,048 hectare block is located in the Putumayo Basin, in the south of Colombia. It operates and holds 60% working interest in Putumayo-12, a 54,444 Hectare block which is adjacent to Platanillo. The company also holds 100% of the Fenix block, a 24,117 hectare area in the Middle Magdalena Basin of Colombia.

It holds 100% ownership of five blocks, holding two exploration and production and three prospecting permits extending over 6.4mm hectares. That adds up to proven and probable (2P) commercially viable oil reserves in the region stand at 24.5 million barrels, worth nearly $1.5bn at current prices. In addition, the oil-rich fields in which it operates allows it to take oil out of the ground very cheaply, and profitably, even with the black gold substantially cheaper than this time last year, something that other operators have struggled to do. Indeed, some have been forced into the red as oil prices plunged – Afren being one of them.

On 12 June this year, shares in Amerisur jumped on news that a deal with Petroamazonas, Amerisur’s new pipeline partner, had been reached. Petroamazonas is the company that operates the Amazonas pipeline network in Ecuador, and this deal will allow Amerisur to build a pipeline from the Ecuadorian border to the Amazonas pipeline network – the work can start immediately.

The company already has permission from the Colombian government to build the interconnecting pipeline between the Platanillo oil fields and into Ecuador. Investors are now waiting on the environmental permission from the Ecuadorian government — management expects that this will be approved in due course. If the green light is given, the pipeline will run underneath the Putumayo River.

For me, if all goes well and the permissions are granted, investors could well see an upward re-rating of the shares as the pipeline will substantially reduce operating expenses and give, potentially significant production growth optionality. It is hoped that everything will be in place in the last quarter of this year.

Final Thought…

Here we have two oil explorers that to my mind are heading in very different directions. The chart illustrates this rather well.

The post Why I’d Steer Clear Of Afren plc But Buy Amerisur Resources plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The recapitalisation plan

Bondholders have agreed to a debt-for-equity swap, which will see 25% of existing bonds being converted into equity. This will reduce the company’s debt by $233 million. Afren will raise about $225 million in net cash proceeds through a combination of the issuance of new high yield notes and a share offer to existing shareholders. The proceeds will be used to fund development of its production assets in Nigeria.

Because of the issuance of new high yield notes, total debt will actually rise to $1.80 billion. Afren will face a reduction bank repayments of US$311 million in 2015 and 2016, as debt repayments are shifted further into the future.

Shareholders’ stake in Aften will be diluted to approximately 15% after the recapitalisation plan. However, this assumes that existing shareholders fully take up the offer to subscribe £49.2 million worth of new shares. Shareholders have yet to vote on whether they accept the restructuring plan.

The company warned shareholders that if they rejected the plan, they would likely see no return of value on their investment. “If the proposed plan is not approved then the alternative restructuring process will proceed, with no scope for flexibility” said CEO Alan Linn. The alternative plan would force Afren to take high interest loans and sell its assets by 2016.

Can Afren recover after its recapitalisation?

The fall in oil prices and disappointing exploration results in the Kurdistan region of Iraq led to some $2 billion worth of impairment charges in 2014 alone. After recapitalisation, Afren should focus on the cash generative business of production and sell of its diverse exploration portfolio, in order to pay down its debts.

Restructuring the independent upstream exploration and production company wont be easy. But by focussing on its high margin production operations in Nigeria, where production costs per barrel are low and where the company is already producing there, Afren has a chance. The three core producing assets in Nigeria, Ebok, Okoro and OML26, are profitable even if oil prices fall to $50 per barrel.

Afren may not need a high oil price to ensure its production is profitable, but it does need a higher oil price to ensure it generates enough cash flow to keep up with its debt repayments. This makes investing in the shares of Afren seem much more of a leveraged bet that oil prices will recover more strongly, and in a shorter span of time, than what markets currently anticipate.

Otherwise, the high debt burden of the company would likely mean that investors will see little return to their investments. If oil prices stays low for longer, then the recapitalisation plan would only delay its bankruptcy.

So should you buy?

Volatility in Afren’s share price creates short term trading opportunities, and a ‘Yes’ vote from shareholders in favour of the recapitalisation plan will likely give its shares a quick boost. But, the risks of investing just seem too high for me. 

The post Is Now The Right Time To Buy Afren plc? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

It has a restructuring plan in place which would keep the company afloat, but at a cost of handing around 89% of its equity over to its lenders — and shareholders who have already suffered a 99% loss since the start of 2014 would be left with very little.

Revolt

Then came an attempted revolt by the Afren Shareholder Opposition Group (Asog), who are trying to reject the proposed equity restructuring at the upcoming EGM — the Afren board needs a 75% vote to approve the share dilution, so does Asog have a realistic chance to stymie it?

The company’s response has been to make it clear that the debt restructuring is to go ahead regardless, and that in the event of a rejection of the equity part of the deal (which is the only thing shareholders can now stop), “…shareholders would be unlikely to see any return of their current investment“.

The shares slumped to a low of 1.28p on 22 June, but the markets were surprised by a surge back up to 2.9p the following day, two days ahead of the firm’s AGM (though they’re back to 1.9p as I write). There was much speculation as to the possible reasons for the spike — might Asog members be buying up as many shares as they can in order to block the debt-for-equity swap?

AGM failure

Well, the result of the AGM itself surprised many of us, with “resolutions 12, 13 and 14, regarding the ability of the Company to issue shares and make market purchases of its own shares in the next 12 months” being defeated. Although the three resolutions are not linked to the refinancing plan and merely affect the day-to-day running of the company, it does look like it could be a testing-the-waters protest vote ahead of the EGM.

The Afren board said it will “re-engage with its shareholders” in the wake of the rejections, but CEO Alan Linn stressed once again that “There should be no doubt: this is the only viable option and there is no room for renegotiation“.

As of 20 May, Asog-registered shareholders controlled just over 10% of the company’s shares, according to the group, but based on voter turnout at previous meetings Asog reckoned it would need only around 17.5% to carry the day. And it’s now looking like there’s a real possibility it could achieve that.

Is the worst yet to come?

I still think a rejection of the deal would be a disaster and I really can’t understand how Asog thinks such an outcome would be in any way desirable. But it really looks like it’s going all the way to the wire now, and the tale might have one more twist to come.

The post Might The Afren Plc Revolt Just Succeed After All? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The bad news, however, is that I need more evidence from its management team in order to assess the fair value of its equity — and even at 1.85p a share, its stock is not an obvious buy. 

But such a call does not hinge on its restructuring plan. 

Deal Or No Deal? 

While a debt-for-equity swap remains the most likely scenario — as Afren says, that is “the only opportunity to realise value and participate in the recovery of the group” —  it’s now time to stress test assumptions, projections and other data.

So, this is the starting point: Afren hit a stumbling block in 2014, when it recorded a whopping net loss of $1.6bn, mainly “due to a reduction in revenues given the fall in oil prices, a material impairment charge of $1.1bn in respect of the carrying value of the company’s production and development assets and the impact of the curtailment of future capital expenditure on our exploration“.

The oil producer is looking to exploit its lower cost production capacity in its Nigerian portfolio and it is focused on delivering on this strategy. To achieve that, it has lowered its full 2015 capex to $400m, which is way below average, based on its trailing financials. 

In normal times, hence before 2014, Afren used to generate revenues above $1.5bn, but its top line dropped to below $1bn last year. Using $1bn of sales as a base-case scenario, and assuming that its gross margin (sales minus costs of goods sold) stands at about 30%/35% (which is a conservative estimate), its adjusted operating cash flow, including depreciation and amortisation, should comfortably hover around $500m/$600m.

Assuming no changes in working capital (WC) — a negative impact from WC could be absorbed by net cash proceeds of $148m from its pending restructuring — Afren should be able to get very close to breakeven in the first year of trade post-restructuring, assuming the proposed capital structure.

On a pro-forma (“as if”) basis, this implies manageable net leverage of between 1x and 2x, depending on certain elements including operating costs.

At this point, you might smell the opportunity of becoming part of a success story that could deliver outstanding returns, and you may even be prepared to invest part of your savings in it right now.

Not so fast.

Problems

The problem, it seems, is that Afren has taken its eyes off the ball in recent times and its strategy may deliver incrementally lower returns, even assuming a neutral capital structure that does not impact much its operational performance. 

While in the first quarter of 2015 Afren achieved an average net production of 36,035 bopd, which is above the guidance range of 23,000-32,000 bopd for 2015, the company “delivered revenue of $130m and operating cash flows before movements in working capital of $59m, down from $269 million and $169m respectively in Q1 2014“. On an annualised basis, these figures imply lowly revenues of $520m (down from about $900m in 2014) and operating cash flow of $236m. 

That doesn’t look good, and although 2015 numbers may greatly differ from these suggested annualised figures, first-quarter results certainly send a warning to exiting and new investors. 

The fall in revenues in the first quarter “was due to lower realised oil prices and production liftings from Ebok utilised to settle a net profit interest (NPI) liability which is part of the agreement“. And here’s the problem: the terms of the restructuring are stringent, and unless Afren can keep up with the good job that — barring 2014 — it did on the operations side in the past, in my opinion it will unlikely become an attractive investment for a very long time…

The post Why I Would — And I Wouldn’t — Invest In Afren Plc Right Now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.