An after-hours announcement last Friday revealed the full scale of the dilution facing Afren (LSE: AFR) shareholders.
Once the firm’s restructuring is complete, existing shareholders will be left owning fewer than 10% of the shares in the restructured firm. Shareholders will have the option to buy new shares in an open offer at 1p per share, but even if this offer is fully taken up, existing shareholders will be limited to a 15% stake in Afren.
The firm’s bondholders will own the remainder of the new shares, alongside their restructured bonds.
Afren shares have already touched a low of 1.3p this year and seem almost certain to go lower, given that a large number of new shares will shortly be issued at 1p per share.
Will Gulf Keystone go the same way?
As I’ve explained before, Gulf Keystone Petroleum (LSE: GKP) has real problems. In 2014, the company spent $36m on interest payments. At the end of last year, Gulf’s total debt liabilities were $538m.
Although Gulf had a cash balance of $84.7m at the start of April, it was also owed an estimated $100m for past oil sales, and has made it clear it cannot currently afford to fund any further development of its Shaikan oil field.
However, there are positives.
Gulf’s hasn’t had to face misconduct issues and has had plenty of time to prepare for this situation. Whereas Afren’s downfall was rapid and sudden, Gulf has been working through this situation for some time.
Is there hope?
Some progress has already been made. The firm has a new chief executive, Jón Ferrier, with considerable commercial experience of the Middle East oil sector.
Production has been stabilised at close to 40,000 barrels of oil per day (bopd) and the terms of the firm’s bonds have been eased.
The firm is in talks with potential partners regarding a possible sale, either of Shaikan or the company. It’s not possible to be sure, but I suspect that Gulf will avoid a repeat of Afren’s situation.
Good for shareholders?
In a Bloomberg interview in April, ex-BP and Genel Energy chief Tony Hayward commented that “the issue for Shaikan … is the capital investment required to bring it to the market in large volumes”.
For this investment to happen, I believe Gulf needs to sell all or part of Shaikan. I cannot see another investor providing funds if they don’t own part of the asset.
Some consolidation is expected in the Kurdistan oil market when conditions stabilise, so a takeover deal is also possible. Regardless of how the transaction is structured, this would enable Gulf to repay some of its debt and share or escape the costs of developing Shaikan to its full potential.
The only problem is that such a deal is unlikely to include much money for shareholders, in my opinion. The top priorities for a buyer will be satisfying Gulf’s lenders and funding the capital expenditure required to develop Shaikan. Shareholders will be well down the list, as we’ve seen with Afren.
Gulf shares have traded in a range between about 32p and 40p since March. I believe that this value is fair. Without a fresh injection of cash and regular payments for oil exports, Gulf’s future is too uncertain to pay more.
