Should You Sell Afren Plc On Today’s News?

Embattled mid-cap oil explorer, Afren (LSE: AFR) released its half-year results today and they did not make for good reading. 

The company revealed that during the first half of the year, oil production fell by a quarter. As a result, revenue slumped 29% and gross profit declined 49% compared to the year ago period.

oilAfren also revised its full-year production forecast downward. Management now believes that the company will produce 32,000 to 36,000 barrels of oil equivalent per day during 2014, 20% below previous estimates.

Lower production was blamed on the temporary suspension of production from the Barda Rash oilfield located within Kurdistan. 

Still, Afren’s management remains upbeat on the future. Toby Hayward, Interim CEO of Afren plc, said:

“Despite recent challenges Afren is totally committed to delivering on our work programme across the portfolio. With numerous growth opportunities expected to drive a step-up in near-term production, cash flow and reserves, we remain in a strong position to deliver shareholder value in 2014 and beyond…”

Look to the future

There’s no denying that today’s report from Afren is disappointing. However, the company is going through a turbulent period and over the long-term things should smooth out.

Indeed, Afren remains highly cash generative, producing an operating cash flow, before movements in working capital, of $354m during the first half. Most of this cash was reinvested in the business, funding exploration and development spending as well as capex. Additionally, within the half-year report the company outlined a plan to grow production at a double-digit rate over the next five years.


Still, Afren is yet to provide any information regarding the temporary suspension of the CEO, Osman Shahenshah and the COO, Shahid Ullah, after they were found to have received a number of unauthorised payments.

An initial independent review, carried out by lawyers at Willkie Farr & Gallagher (UK) LLP, discovered that Iain Wright and Galib Virani, associate directors of the company had also received unauthorised payments made by a third party. Iain Wright and Galib Virani have been temporarily suspended pending a full review. 

With four members of Afren’s management team now missing, the company is in crisis mode. Willkie Farr & Gallagher have now engaged KPMG, at the request of Afren, to undertake an independent review of the company’s accounts and a conclusion is expected during September. 

What’s left of Afren’s management team is adamant that the company has not been fudging its financial statements over the past few years, although as of yet nothing has been proven. For the time being, until KPMG have reported on the matter, for me, Afren remains a high risk bet.

Spread out

That said, if you already hold Afren you don’t need to jump ship just yet, although then it might be sensible to spread your risk and use a basket portfolio approach. A basket approach involves building a portfolio with a combination of both risky oil companies and reliable dividend-paying stocks, reducing risk and allowing you to sleep soundly at night. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Afren. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.