Shares in Afren (LSE: AFR) rose sharply when markets opened on Friday morning, following the publication of the firm’s 2014 annual results after markets closed on Thursday.
The big headline figure was a $1.65bn post-tax loss for last year, thanks mainly to impairments of $1,198m on Afren’s Kurdistan assets, which were written down to zero.
Revenue fell by 42% to $946m, from $1,644m in 2013, while production fell by 32%. This was due to delays with new production and to the firm’s production entitlement falling at the start of 2014, as a result of Afren having recovered the initial costs of the Ebok development.
As a result of the re-categorisation of the Barda Rush reserves in Kurdistan, Afren’s total reserves fell by 44% to 161 million barrels of oil equivalent (mmboe), down from 286mmboe at the end of 2013.
All in all, a pretty terrible year — but is there hope for 2015 and beyond?
Interim funding complete
In a separate announcement on Thursday night, Afren also announced that its interim funding plan had been completed, resulting in the issue of $255m of new high-yield bonds, with the option to increase this to $305m.
According to the firm, these funds will be used to clear some of Afren’s backlog of unpaid bills and to ensure that core production in Nigeria is maintained. However, this is only an interim measure — a full recapitalisation is due to take place later this year.
The details are quite complex, but the key element for existing shareholders is that a substantial part of Afren’s debt will be converted into new shares, leaving existing shareholders owning a much smaller part of the company.
According to last night’s announcement, if the recapitalisation is completed to plan and the open offer of new shares to existing shareholders is taken up in full, Afren expects existing shareholders to hold approximately 14% of the enlarged share capital of the firm.
2 worrying numbers
Afren’s 2014 results show that the firm’s net asset value is now $249m, putting the shares on an apparently cheap price to book value ratio of 0.23.
However, if existing shareholders will only own around 14% of the equity after recapitalisation, then my calculations suggest that the effective book value of existing shares is around 1.6!
Afren’s book value may change following recapitalisation, but the effect will be very similar, and suggests to me that Afren shares are overvalued at present.
A second problem is Afren’s costs: the firm struggled last year with an average realised oil price of $97 per barrel.
The average oil price this year is likely to be much lower, in my view, suggesting that net cash from operating activities will be lower than the $538.7m reported for 2014.
Given that Afren spent $203.1m on debt repayments last year, my feeling is that, once essential capital expenditure has been accounted for, Afren is likely to struggle to deliver positive cash flow in 2015 — and may even need to borrow more money.
In my view, today’s bounce could be a good opportunity to sell.
