As the struggle to recapitalise struggling oil explorer Afren (LSE: AFR) nears its climax, the Afren Shareholder Opposition Group (Asog) has been campaigning for a No vote at the upcoming EGM. Even though the proposed debt restructuring deal is not itself open to a vote and the only thing they can possibly stop is the accompanying equity dilution, Asog still apparently hopes it can get a better deal than what is on the table.
But on 19 June, after the markets had closed, the Afren board came out fighting. And in possibly the most forthright “wake up and smell the coffee” RNS release I think I’ve ever read, they made it clear they believe there really is no choice. According to the board, the proposed deal to restructure debts that would hand the bulk of the company’s equity over to its bondholders provides “…the only opportunity to realise value and participate in the recovery of the group” and will head off formal insolvency.
It’ll still happen
If the shareholders reject the equity part of the deal, “the restructuring will still proceed without delay“, debt will immediately rise by around $266m, a sale of all the company’s assets will become obligatory by the end of 2016, and shareholders won’t get a bean until every last cent of debt is repaid.
And as if that isn’t scary enough, the firm went on to say (in bold) that “The directors consider that if shareholders do not approve the resolution at the General Meeting, the shareholders would be unlikely to receive any proceeds from the sale of the group or the required disposal of the group’s assets or other return of income or capital by the company, and therefore the shareholders would be unlikely to see any return of their current investment“.
In order to bolster support, Afren has also launched a shareholder information microsite hosting video presentations and other information.
99% loss
What’s the market reaction? Well, as I write the shares are down another 8.6% on the day to 1.5p, and down 40% since I last warned that there was no other way out — and the loss since the start of 2014 has now reached a painful 99%. The attempted fight to hang on to as much of Afren’s value as possible is understandable, but it’s just not been realistic.
Unfortunately I’ve seen similar things happen numerous times in the past, when a company has hit the skids but it’s taken too long for shareholders to grasp the reality of the situation. And knowing when to cut your losses and run really is one of the hardest things to learn in the investing business.
What now?
In Afren’s case, I think the classic rule of thumb of “When a company materially changes, get out” would have served investors well. But it’s easy to say that after the event, and it’s very hard to avoid thinking at every downturn that the worst must surely be over.
I fear the only real question now is whether today’s 1.5p per share represents better value than the equity that will remain in existing shareholders’ hands once the deal is done, unless there’s a sudden and unexpected recovery in the oil price that would boost the proceeds from an asset sale — but that must be the least likely scenario right now.
