Time is running out forAfren (LSE: AFR). The companys future now hinges on a deal withSeplatbut so far, no deal has been forthcoming and with every day that passes, the group gets closer to the edge.
Taking too long
Afrens only hope is to hammer out a takeover deal with Nigerias Seplat Petroleum. Indeed, City analysts believe that if Afren fails to negotiate a deal, it will fail pretty quickly. Specifically, analysts believe that with oil prices at present levels, Afrens operations will only generate enough cash to cover its debt interest payments over the next 12months.
This forecast assumes that Afren reduces capital spending to zero: an unrealistic assumption. The company will still have to carry out maintenance on its existing oil fields.
Unfortunately, it seems as if a deal between Afren and Seplat is unlikely to go ahead. The two parties have been in talks for nearly two months now and so far no deal has been announced.
Its possible that Seplat wants to carry out rigorous due diligence on Afren, which would explain the delay but its more likely that the two groups are fighting over an appropriate purchase price. After all, Seplat will have to take on Afrens liabilities if it acquires the company, including Afrens $1.2bn debt pile. This means Seplat will have to seek approval from Afrens bondholders.
Nevertheless, a resolution to whatever issue is causing the delay will have to be found soon. The deadline for Seplat to make an official bid is 5pm on 13 February, which gives the company only two days.
Worst-case scenario
Bondholders are not known for their flexibility,and if a deal hinges on bondholders demands then its likely that shareholders will be wiped out. Lenders have already been extremely lenient towards Afren, and its unlikely that they will continue to be so forgiving.
For example, lenders of the $300mEbok debt facility agreed to a deferral of the $50m amortisation payment due on 31 January until 27 February. A 30-day grace period under the 2016 bonds has also been utilised with respect to $15m of interest that had been due on 1 February.
But this means at the end of February, Afren, if it is still independent, will have to find $65m to fund interest costs or admit defeat. Raising funds via a rights issueremains an option, although this would have to be a last ditch attempt.
The bottom line
So overall, it looks as if time is running out and it could be time for shareholders to jump ship before the company disappears for good.
Still, as always, I strongly recommend that you do your own research before making any trading decision. To help you assess Afren, our top analysts have put togetherthis new report from The Motley Fool.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Afren. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.