Shares in Afren (LSE: AFR) have slumped by as much as 11% today after the struggling oil exploration company announced that it had called in the Serious Fraud Office (SFO). Although shares in the company are now flat on the day at 3.5p each, a review being undertaken by law firm Willkie Farr & Gallagher has highlighted concerns regarding expenses paid to an individual hired by the company in 2012. Encouragingly for investors in Afren, though, is the fact that the company has “taken steps to halt its previous practices in relation to such expense payments”.
Rescue Deal
Of course, the review by the law firm had been a condition of the $200m deal provided by the company’s bondholders which will see them convert a portion of their debt to equity and also provide the company with a cash injection. Clearly, this was bad news for existing equity holders, but the alternative was apparently for Afren to go into administration, since no realistic bids had been forthcoming. And, while the plan to provide the company with a cash injection could still go ahead, the outcome of the SFO’s investigation will inevitably cause a cloud to hang over the company’s share price in the near term and put its valuation under even more pressure.
Looking Ahead
Clearly, the performance of Afren in recent months has been hugely disappointing, with the company’s share price falling by an incredible 93% since the turn of the year. As such, it is likely that most investors in the company have seen the value of their investment plummet so that it is no longer a major part of their portfolio. As a result, it could be argued that it is worth hanging on to Afren for the time being, since the company does have a relatively attractive asset base and, in time, could become a viable turnaround story.
Realistically, though, Afren’s financial situation could get worse. Certainly, the SFO may find no issues with the company and the expenses it has made, but equally there is the potential for things to get worse before they get better. As such, and with a whole host of other oil companies that are trading at very appealing valuations, Afren seems to be a stock worth avoiding at the present time, with the uncertainty regarding the investigation likely to mean a further drop in the company’s share price in the short term. Therefore, while it could come good in the long run, there are better places to invest your hard-earned cash right now.
