Shares in Afren (LSE: AFR) are among the top risers in the FTSE 250 today after speculation surrounding a bid for the company has intensified. This has taken place because Afrens potential suitor, Seplat Petroleum Development Co, has secured a refinancing deal that includes an option to extend the facility by up to 700 million in order to take part in M&A activity.
Furthermore, the two companies have confirmed that they are now in highly preliminary talks regarding a possible takeover of Afren by Seplat, although no information has been given on the numbers being discussed or whether any offer would be cash or cash plus shares in the new entity.
A Challenging Period
The potential for a deal seems to have come about at least partly because of the considerable fall in Afrens share price in recent months. For example, it has declined by 79% over the last year, thereby making the company more attractively priced to potential suitors, such as Seplat. Clearly, a key reason for this has been the fall in the price of oil, but a payments scandal involving Afrens former CEO and COO also caused investor sentiment to weaken considerably.
In addition, just this week Afrens share price was dealt a further blow when it announced that there had been a significant downgrade to the reserve estimate at the Barda Rash field in Kazakhstan. As a result of this, Afren is said to be considering its options in regard to the future of the project.
Clearly, a bid for Afren is a distinct possibility and, for investors in the company, it could prove to be a good thing. Although it may not recoup losses felt over the last year, it may provide an exit at a share price that Afren is perhaps unlikely to achieve without being taken over especially while the price of oil keeps on falling.
However, buying shares in any company just because a bid seems likely is a high-risk strategy. Clearly, if no bid materialises (which is still a possible outcome of the talks) then Afrens share price is likely to fall considerably, since a takeover premium is already starting to be baked into its valuation. For example, Afren is now trading on a price to earnings (P/E) ratio of 18.9, which appears to be rather generous given the challenges it is facing. Of course, if a bid does come in from Seplat, then a further share price rise is almost inevitable.
So, the outcome appears to be somewhat binary and depends on the outcome of an event that none of us can accurately predict. Due to this being the case, it may be prudent to sit on the sidelines and seek out other companies that appear to have more appealing long-term prospects than Afren.
With this in mind, the analysts at The Motley Fool have written a free and without obligation guide called 7 Simple Steps For Seeking Serious Wealth.
It’s simple, straightforward and could help you to discover a number of companies with excellent long term prospects, and that trade at highly appealing prices. As such, it could make a real difference to your returns this year.
Click here to get your copy of the guide – it’s completely free and comes without any obligation.
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.