Afren Plc Plummets As Shareholders Face £200m+ Cash Call

Afren Plc (LON:AFR) is in dire straits: should shareholders cut and run, or stay put?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Afren (LSE: AFR) shares fell by up to 66% in the first half-hour of trading this morning, after the firm revealed that shareholders in the Nigeria-focused firm are likely to face a £200m-plus cash call to plug a gaping hole in the firm’s finances.

The firm says it is seeking to delay $65m of interest payments and is in discussions with investors about issuing new shares to raise an amount “in excess of the Company’s current market capitalisation”, which was £195m before today’s rout.

What has gone wrong?

In a statement this morning, Afren says that although it did have $235m of cash on hand at the end of 2014, most of this was either restricted to meet operational requirements, or has since been used to fund capital expenditure that took place in the closing weeks of last year.

What this means, in my view, is that Afren was living from hand to mouth for most of last year. Every cent of operating cash flow was being spent on capex, and most of the firm’s debt facilities were already full drawn.

When oil prices fell at the end of last year, Afren’s cash flow fell too, leaving the firm unable to fund its existing commitments — hence the disappearing cash pile.

Should we have seen it coming?

I’ve looked back through the firm’s results for the first nine months of last year, and some of this should have been obvious.

The firm’s cash flow statement for the first nine months of last year shows that net cash from operating activities of $454.8m was completely swallowed up by $488.7m of capital expenditure, while some of its cash reserves were used to pay financing costs.

However, I don’t think the restricted state of Afren’s cash balance was made completely clear: oil companies usually specify how much of their cash is restricted. Afren didn’t, implying — in my view — that none of it was restricted.

Is Afren a recovery buy?

As I write, Afren shares are changing hands for around 9p. A bid from Seplat could still come through, and cause the shares to rise sharply in value.

However, I don’t think this is very likely. Seplat has no incentive to rush in and make a bid, and may instead choose to take control by taking part in the firm’s fundraising, or purchasing some of its debt.

Sell or wait?

If I’d bought shares at recent lows, as a recovery play, I’d be tempted to cut my losses and sell today. The outlook is just too uncertain.

Longer-term shareholders might as well hold, however, as they’ve lost almost everything already.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »