From time to time I come across a “dead man walking” company and I really wonder why some people are prepared to shell out anything at all to own some. One of them is Afren (LSE: AFR), whose shares have lost more than 98% of their value since the start of 2014, and today change hands at just 3p apiece. But are they still overpriced?
To illustrate the problems besetting the Africa-based oil explorer we need only look at its Q1 figures released last week, which showed revenue crashing and its debt mountain growing ever higher.
Sky-high debt
Net production was within expectations at 36,000 barrels per day, but revenue in the quarter slumped to $130m from $269m in the same quarter a year previously, for a drop of 52%. In terms of cash flow (before movements in working capital), we saw a crunch from $169m a year ago to just $59m.
Capital expenditure during the period reached $212m, and the company’s net debt figure scraped $1.2 billion (up from $1.07 bn at the start of the quarter). And it has a market capitalization of only £31m ($47m).
The firm has managed to get some interim financing in place, but it needs a substantial longer-term recapitalization, with chief executive Alan Linn saying “We will be working with shareholders in the coming weeks to explain the benefits of our proposed new funding structure and encourage them to support us in resolving our financing issues“.
Enormous piles
The company’s bondholders are going along with these plans, having agreed to sign up for more senior notes than expected, and that suggests they have some confidence that they will eventually get their returns. The firm is slashing its capital expenditure for the rest of the year, but it’s still set to outstrip its cash inflows, and that will mean an even bigger debt pile by the end of this year.
The low oil price obviously isn’t helping, but that would be partly ameliorated by increased production volumes. Unfortunately that is not likely to happen, with Afren estimating a full-year production level of between 23,000 and 32,000 barrels per day — significantly below the first quarter’s figures.
Mr Linn is putting on the bravest face he can, but when he says that “funding remains extremely tight” he is not exaggerating.
Knife edge
Afren is heading into a crucial phase now, which could lead to either a viable long-term future through some sort of financial restructuring, or it could be the end of the line. I’m not going to try to call it — but it’s surely a pure gamble right now.
