The next 12months will be a trying time for struggling oil producer Afren(LSE: AFR). The group is struggling to remain solvent and a last-ditch recapitalisation plan will almost completely wipe out existing shareholders.
And unfortunately, even after therecapitalisation, debt will continue to be a problem for Afren.
Specifically, the company is only planning to convert 25% of its debt falling due during 2016, 2019 and 2020 into equity, with the remaining debt being reinstated and extended to 2019 and 2020 at an annual coupon of 9.1%. Whats more, the creation of the$200m super senior private placement notes and$321m of new high-yield notes will saddle the group with a hefty annual interest bill.
That said, Afrensrecapitalisationwill provide the company with $300m in cash for immediate use. However, its unclear how long this emergency cash will last.
In particular, Afren has taken steps to reduce its capital spending, but is still planning to fork out $500m to maintain and upgrade its Nigerian oil projects this year. Moreover, the companys income is being throttled by the low oil price. A key test for the company will come at the end of April, whena $50mdebtpayment falls due.
With all these factors weighing on the company, onething isfor sure: Afrens new CEO has got his work cut out.
A new leader
After six months without a CEO, Afren has finally managed to bag a new manager. Alan Linn, one of Afrens existing consultants, hasagreed to take on the role of chief executive on completion of interim financing arrangements.
And Mr Linn seems to be a great catch for the ailing oil company. After a 15-yearcareer withExxonMobil, Linn has also spent time working forCairn EnergyandTullow Oil.
Still, it remains to be seen if Mr Linn can return Afren togrowth,although he certainly has enough experience for the task.
During the first week of April, Afren informed shareholders that the company wasmaking good progress on satisfying the relevant conditions precedent to the provision of the interim funding and completion is expectedimminently.
So, Afrens shareholders should find out within the next week or two whether or not the companys capital recapitalisation has taken place. After that, the groups new CEO will have to get straight to work,cuttingcosts and selling assets to boost income but the odds are stacked against him. With a mountain of debt and unfavourable oil price, the next few months are going to be extremely difficult for Afren. Theres no guarantee that the company will every return to its former glory.
A risky business
Afren is a prime example of theperilsof the oil industry. Indeed, one thing to remember is that the oil business can make yourichbut it can also make you poor.
That’s why the best investors build a portfolio with a combination of both risky oil companies and reliable dividend paying stocks, reducing risk and allowing you to sleep soundly at night.
To help you build your defensive portfolio,our top analysts have put togetherthis special free report.
The report guidesyou through the seven key steps all successful investors follow, helping you to assess your own personal risk profile and make more informed trading decisions. What’s more, the report is designed to help you accomplish your goals with just 20 minutes of work a month.
Click hereto check out the report–it’s completely free and comeswith nofurther obligation.
The Hidden True Story Behind This Black Sheep Stock!
This controversial British retail tycoon is unloved by the city and even his own shareholders.
But behind the media headlines, his company is about to make a daring global e-commerce play that could take many people by surprise
and may make savvy investors who get on-board now very rich in the years ahead.
Read on to discover THREE hidden factors that we believe make this one of your most potentially lucrative investments of 2015!