For a risk taker, the obvious opportunity with Afren (LSE: AFR) would be to negotiate a hard bargain to buy part of Afrens distressed debt, rather than any of its equity, which lost 71% of value on Tuesday after the oil explorer issued an update regarding the review of its capital structure, liquidity and funding requirements.
However, the shares are up almost 40% on Wednesday in early trade.
Afren is running out of cash and will likely default on debt payments, in my view. So, it will have to try and raise fresh equity or sell itself, neither of which may turn out to be a fantastic outcome for shareholders, whose holdings are worth peanuts right now.
Afren continues to be in discussions with Seplat, the company said on Tuesday. You bet it does.
What a great opportunity to add exposure and buy Afrens equity, Mr Banker, who has been working in restructuring for 30 years, told me when the news emerged on Tuesday. That caught me off guard. I knew what Mr Banker meant, but is Afren really a great opportunity at this price? Other oil explorers such as Premier Oil and Tullow Oil for instance, seemsafer investments, so I am not sure why anybody would invest in Afren even at 5p/7p a share.
Much depends on whether the banks and bondholders will show mercy,and how quickly Afren is burning cash these days, which in turn will determine the amount of new equity needed to fund the operations. Afren doesnt have enough cash on the books, so it needs to negotiate a waiver and amend its existing debt obligations with its bankers, who may provide it with the funds needed.
After all, cheap liquidity can be had in this environment. So, how much cash would Afren need to survive?
Time For A Brave Call?
Afren runs a business that costs between $2m and $3m a day, according to my best guess, which is based on Afrens financials and cash flow statements.
Operating cash flow before adjustments in working capital came in at $496.2m in the nine months to 30 September 2014 (Q3 2013: $859.9m). After adjustments in working capital are made, including tax payments of $53m, net cash generated by operating activities was $454.8m (Q3 2013: $880.3m), Afren said last year.
That was just enough to cover investment in producing and development assets, exploration and evaluation projects, according to Afren figures.
The company had a cash balance of approximately $235m at 31 December 2014, Afren said yesterday. If I am right, and Afren is burning $2m/$3m a day, its gross cash pile would have come down to about $155m which is consistentwith Afrens latest statement, according to which liquidity available to the Company is significantly lower now than at 31 December.
45/60 Days Of Life Left?
So the business has room to run as a going concern perhaps until late March. Of course, Afren has the cash to repay outstanding debts but it must avoid debt repayments. Its troubled and will default on its debts which is not a big deal, really, if a company can successfully execute a recap.
The problem, however, is that even if it cuts back on capex to, say, $500m a year (about half the level of heavy investment in 2013) itll still need to raise about half a billion dollars from the equity market to survive for about a year or so
Frankly, Afren may not be worth the pain, and I’d rather invest part of my savings in a properly diversified portfolio comprising most of the stocksidentified in this report by our Fool analysts.
The value candidates identified by our Foolish team could well offerrising and market-beating dividends andcapital gains north of 10%this year, so I suggest youdownload the report right now, bysimply clicking here!
Our report is available fora limited amount of timeand comes without further obligations, of course.
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.