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Is Afren Plc A Buy Right Now?

To say that oil explorer Afren (LSE: AFR) has suffered an annus horribilis in 2014 would be something of a colossal understatement. Enduring weakness in the oil price, combined with financial improprieties in the boardroom and production reports badly missing forecasts, has severely crimped investor appetite for the firm in recent times.

As a result shares in the business have tumbled 79% during the course of the year, and bottomed out at just under 33p per share this week, the lowest for almost six years.

Drilling report reveals terrific potential

Still, shares flipped almost 10% higher yesterday following a positive drilling update at its operations in East Africa, viewed by many as a potential growth driver in future years.

Afren announced that drilling and coring work at its Block 1101 onshore project in Madagascar had completed, revealing the presence of oil resevoirs across the Triassic, Jurassic and Cretaceous zones. The company plans to carry out further analysis of the area during the first quarter of 2015, positive results from which could thrust shares higher again

A snip at current prices

The City’s army of analysts do not expect the firm’s earnings improvement to offer much reason for cheer over the next year as group-wide production problems endure, however. Indeed, current forecasts indicate a 61% decline in earnings for this year to 11p per share. And an additional 29% decline is chalked in for 2015 to 7.8p per share.

Still, I believe that Afren still provides excellent value at current levels. The business changes hands on a modest P/E multiple of 3.3 times prospective earnings for 2014, some way below the benchmark of 10 times or below which marks represents stunning value. And this remains low at just 4.4 times for 2015.

Make no mistake: the revenues-crushing impact of declining oil prices is not expected to dissipate any time soon as surging US shale output and rampant production from OPEC nations swamps the market with oodles of new capacity. And with the global economy continuing to waver and US stockpiles breaking at the seams this imbalance is likely to be rectified any time soon.

But given Afren’s suite of top-notch projects and relatively low earnings multiples — by comparison oil majors BP and Royal Dutch Shell change hands on forward readouts of 9.1 times and 8.7 times correspondingly — the business can be considered a potentially explosive stock with less risk than its sector peers.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended 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.