Why I’d Steer Clear Of Afren plc But Buy Amerisur Resources plc

Dave Sullivan digs around Afren plc (LON:AFR) and Amerisur Resources plc (LON:AMER) — will he strike it rich?

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.

Since I started writing for The Motley Fool, I have covered several companies. Today, I revisit Afren (LSE: AFR) and Amerisur Resources (LSE: AMER). I’m checking back in with both of these oil producers to take a fresh look to see whether my views should change for the better, or, indeed the worse.

The rationale behind this approach serves to make sure that I don’t lose sight of any companies that interest me, and help me to gauge whether my analysis has been accurate, or otherwise.

So while I haven’t directly compared Afren and Amerisur before, I felt like now was as good a time as ever, especially as both companies have released news recently.

Afren – Debt Becomes Her…

The last time I wrote about this company, the shares were trading at nearly double the price that they are currently. Whilst the shares remain volatile, I would urge caution for any investor who thinks that they are currently cheap – here’s three reasons why:

  • Debt – if anything can kill a company, it is debt. Sadly, Afren has no shortage of it. As we head towards the company restructuring, and assuming that the open offer is taken up in full, the company will still have well in excess of £1 billion pounds of debt. Rather unsurprisingly, the bondholders are not giving Afren their best rate, either, with the 2019 and 2020 loan notes yielding over 9%. Shareholders in my view are currently at the mercy of the bondholders, and bondholders are not known for their generosity! This is currently strangling the company; sadly, I expect the situation to get worse.
  • Known unknowns – additionally, the company tells us that there is a number of claims against the company. There is one for over $104 million from West African Ventures in termination and cancellation fees, costs, losses and expenses under oil services contracts. Another by Lion Petroleum for US$10 million in damages plus costs in respect of certain breaches of the JOA signed between East African Exploration (Kenya) Limited and Lion Petroleum in respect of Block 1, Kenya. Finally, there is another with Amni, where the potential cost cannot be quantified.
  • Working Capital – in the prospectus, the company tells investors that it doesn’t believe that it has enough working capital for twelve months of operations.

Any one of the above issues should make investors nervous, especially as they are being asked to hand over more cash under the open offer.

Amerisur – No Longer A Pipe Dream…

With a market cap of around £400 million, Amerisur is the 559th largest company in the UK. It is an independent oil and gas production and exploration company focused on South America. It owns assets in Colombia and Paraguay, where it operates and holds a 100% working interest in the Platanillo block in Colombia. The 11,048 hectare block is located in the Putumayo Basin, in the south of Colombia. It operates and holds 60% working interest in Putumayo-12, a 54,444 Hectare block which is adjacent to Platanillo. The company also holds 100% of the Fenix block, a 24,117 hectare area in the Middle Magdalena Basin of Colombia.

It holds 100% ownership of five blocks, holding two exploration and production and three prospecting permits extending over 6.4mm hectares. That adds up to proven and probable (2P) commercially viable oil reserves in the region stand at 24.5 million barrels, worth nearly $1.5bn at current prices. In addition, the oil-rich fields in which it operates allows it to take oil out of the ground very cheaply, and profitably, even with the black gold substantially cheaper than this time last year, something that other operators have struggled to do. Indeed, some have been forced into the red as oil prices plunged – Afren being one of them.

On 12 June this year, shares in Amerisur jumped on news that a deal with Petroamazonas, Amerisur’s new pipeline partner, had been reached. Petroamazonas is the company that operates the Amazonas pipeline network in Ecuador, and this deal will allow Amerisur to build a pipeline from the Ecuadorian border to the Amazonas pipeline network – the work can start immediately.

The company already has permission from the Colombian government to build the interconnecting pipeline between the Platanillo oil fields and into Ecuador. Investors are now waiting on the environmental permission from the Ecuadorian government — management expects that this will be approved in due course. If the green light is given, the pipeline will run underneath the Putumayo River.

For me, if all goes well and the permissions are granted, investors could well see an upward re-rating of the shares as the pipeline will substantially reduce operating expenses and give, potentially significant production growth optionality. It is hoped that everything will be in place in the last quarter of this year.

Final Thought…

Here we have two oil explorers that to my mind are heading in very different directions. The chart illustrates this rather well.

 

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.

Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Young Caucasian man making doubtful face at camera
Investing Articles

When will Shein hit the UK stock market and should I invest?

With Shein looking likely to list on the London stock market in 2024, this writer weighs up the case for…

Read more »

Investing Articles

Start supercharging passive income with REITs!

Are REITs the ultimate investment for boosting income generated from a portfolio? Zaven Boyrazian explores some of the most lucrative…

Read more »

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »