Embattled oil minnowAfren(LSE: AFR) has sprung into life this week.
After falling to a new all-time low of 1.37p last week, this week the companys shares have almost doubled. At one point yesterday the companys shares had risen by 70% on the day. Volume surged with around 1.5bn Afren shares, worth more than 200m, changing hands throughout the day.
Buyers continued to push Afrens shares higher this morning, although, at the timeof writing, the companys shares seem to be coming off the boil having fallen 6% at time of writing.
Nevertheless, even after todays declines Afrens shares are still up by 64% this week. The question is, whats driving this rally?
Theres no clear reasonwhy Afrens shares have suddenly sprung to life this week. But there are several different factors that could be behind the rally.
For a start, Afrens shares have been faced with unrelenting selling pressure during the past month, which has cut the groups share price in half. Yesterdays rally could have been driven by whats called, in trading terms, a dead cat bounce.
Derived from the idea that even a dead cat will bounce if it falls from a great height, a dead cat bounce is a temporary recovery in a stock price after a substantial decline, caused by speculators buying.
Blocking the deal
Anothertheory as to why Afrens shares suddenly took off is that investors are buying up the companys shares to block the proposed debt-for-equity swap.
The dealannounced last Friday is opposed by many of the companys shareholders, although its unclear what the future holds for Afren if the swap doesnt go ahead.
Even if the swap does go ahead, Afrens existing shareholders will be all-but wiped out. The $300m debt for equity deal will leave existing holders with just 11% of the company.
According to a presentation on the restructuring, released byAfrenearlier this week, without the deal the company will be faced with the prospect of even more debt and crippling borrowing costs.
Last minute bid?
The final theory thats being touted by speculators is the idea that a buyer could be in last-minute talks to acquire Afren. This theoryis not as unrealistic as it sounds.
While its true that Afren is struggling under an enormous debt load, the company is still producing oil and generating cash. At the right price, the company could be an attractive proposition for a buyer.
However, it is likely that any buyer would demand a restructuring of debt before they make an offer for Afren. BuyingAfrenwould mean buying the companys debt load, a prospect thats unlikely to appeal to any buyers.
So, what should investorsdo followingyesterdays rally? Well, it depends on your outlook for Afren.
If you believe that Afren has a bright future after the restructuring, theres no need to sell.
On the other hand, if you no longer trust Afren and believe that the company is heading for the rocks, it could be wise to use this rally to sell up.
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