Afren (LSE: AFR) shares rose by more than 50% in the first half hour of trading this morning, leaving them around 65% higher than when markets opened on Friday.
Afrens gains on Friday came after the firm revealed that that the UK Takeover Panel had agreed to allow bid talks with Seplat to be extended until 13 February.
However, this mornings gains may also have been driven by a second statement issued by Afren, late on Friday evening, after markets had closed. In this statement, Afren confirmed it had agreed with its lenders to delay $65m of interest payments until the end of February.
Should you be buying or is this a good chance to sell, before its too late?
The smart money is out
Big institutional investors are often criticised by private investors for their high fees and average results, but they do tend to have a good understanding of financial analysis and risk.
Two of Afrens biggest institutional investors Standard Life and SKAGEN Funds have sold 107m shares in Afren since November. Thats equivalent to nearly 10% of the oil firms shares.
Who has bought those shares? We dont know, but if any shareholders had increased their stakes above 3%, then Afren would have had to disclose this. This hasnt happened, suggesting to me that smaller investors have picked up the shares in the hope of a rebound.
The harsh reality
Ultimately, Fridays statements didnt change anything: Afren still has no cash and is now effectively in arrears to the tune of $65m on debt interest payments, which have simply been delayed for a month.
Its important to remember that debt repayments always take priority over shareholder rights: Afren is now effectively controlled by its lenders, and any solution to the current situation is likely, at best, to involve shareholders being heavily diluted.
Seplat may yet make a bid, but any offer is unlikely to be at a premium to the current share price, as theres no need for this. Realistically, all Seplat would have to do to take control of Afren is to agree to take responsibility for Afrens debt and funding obligations and perhaps make a nominal offer below todays share price for the shares.
Shareholders would have no choice but to accept, because Afrens lenders would withdraw their support if the offer was not accepted, leaving Afren in administration.
In my view, buying Afren shares in todays market is complete speculation and very high risk: even in the troubled oil market, there are far better buys available elsewhere.
If you’re keen to identify such oil plays where the risk-reward balance is in your favour, then I’d urge you to take a look at “10 Steps To Making A Million In The Markets“.
This exclusive Motley Fool report includes details of a simple 10-step process which could help you to build a million-pound portfolio from growth stocks.
This report is free and carries no obligation. To receive your copy today, click here now.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.