The best way to try and value troubledoil companies likeAfren(LSE: AFR) andGulf Keystone Petroleum(LSE: GKP) is to try and place a value on their assets.
In particular, a sum-of-the-parts analysis provides a range of values for a companys assets, debt and other interests,giving adefinitive net present value figure.
This figure can then be used byinvestors to assess whether or not a company is cheap, or expensive. Moreover, the net present value figure a good idea of how much a company could be worth if it is either taken over, or goes out of business.
Sum of the parts
According to analysts, Gulf KeystonesShaikan field alone, in its current state, after deducting debt is worth in the region of 20p to 30p per share. This valuation assumes that the price of oil returns to $90 per barrel by 2016.
Additionally, Gulf Keystones other assets, including the full development of the Shaikan field, could be worth up to 79p per share, or 132p per share in a best case scenario. So, in total, analysts believe that Gulf Keystones net asset value, including the value of the Shaikan field, as well as other developments and intangible assets stands at 119p in the base case, or 190p per share in the best case.
However, these figures are slightly dated and dont reflect the level of cash burn Gulf Keystone has reported over the past few months.A back-of-the-envelope calculation suggests that this cash burn could have reduced Gulf Keystones net asset value by 10p to 20p per share.
Still, even after factoring in cash burn, in the base case Gulf Keystones net asset value stands at just under 100p per share, a full 100% above current levels.
Dilution
Unfortunately, Afrens net asset value per share is not that easy to calculate.
Afrens shareholders are facing significant dilution as the company restructures its debt to try and survive. City analysts estimate that in the worst case scenario, Afrens existing shareholderswill only receive 5% of a potentially restructured company. This figure is based on the amount of cash that will need to be raised following a restructuring.
As a result, any per share calculation will have to be adjusted to reflect this figure.
Nevertheless, Afrens assets do have some value left in them. After deducting debt, analysts estimate that Afrens oil producing assets, and reserves are worth in the region of$600m with oil at $60/bbl. If the price of oil returns to $80/bbl, analysts estimate that Afrens assets will be worth a grand total of $1.4bn.
These figures look impressive but they do not reflect the dilution from restructuring. After adjusting for dilution, the net asset value for Afrens current shareholders is between $30m and $70m, or in sterling terms 19.7m to 46m. With 1.1bn shares in issue, Afrens adjusted net asset value per share is in the region of 1.8p and 4.2p.
Days of growth are over
So it looks as if the days of rapid growth for Afrenare now over and investors shouldn’t expect fireworks from the company any time soon. It’s going to be a long time before the company returns to growth.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Afren. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
