Embattled oil explorer Afren (LSE: AFR) is falling once again today after issuing a dismal reserves update, with its shares down 23% at the time of writing.
In particular, as part of the company’s annual reserves review, an updated Competent Person’s Report of the group’s Barda Rash in Iraqi Kurdistan, is expected to a significant reduction in field reserves.
The new CPR is based on the reprocessing of 2012 3D seismic data, as well as the results of the company’s Barda Rash drilling campaign. Unfortunately, the updated report is expected to show that gross 2P reserves, initially believed to be 190 million barrels of oil, have fallen to zero, while gross 2C resources will be revised down from 1,243 mmbbls, to around 250 mmbbls.
Plan of action
According to Afren’s press release this morning, the Barda Rash field has been troublesome for some time. The oil wells operating on the field have been producing higher water cuts than expected, and Afren has struggled with the challenge of drilling Barda Rash’s complex fractured reservoirs.
However, it now seems as if the group is looking to sell its 60% working interest in the field. According to this morning’s press release:
“Production from these reservoirs could potentially be achieved with the implementation of recovery schemes requiring significant capital expenditure, which may well be appropriate for a company with a different strategic focus. Furthermore, while recent results at the field have indicated the presence of light oil accumulations from the deeper Triassic Kurra Chine reservoirs, these have a high level of associated Hydrogen Sulfide (H2S), which would require significant capital expenditure to develop. In light of the above, the Company is now considering its strategic options for the Barda Rash field.”
This seems to suggest that Afren is looking to find a buyer for its Barda Rash share, which would give the group more time to focus on its core portfolio in Africa.
Plenty of bad news
Today’s reserve news is just the latest in a string of bad news stories to come from Afren. Indeed, over the past 12 months the company has been forced to fire its CEO and COO for “gross misconduct”, production has fallen and income has slumped. There are also serious concerns about Afren’s financial position with oil trading below $60 per barrel.
Specifically, City analysts have warned that as Afren’s Nigerian tax break expires in 2016, the company is going to struggle to generate enough free cash flow to pay down debt after this expiration. What’s more, with oil below $60 per barrel, according to analysts Afren’s much touted Ogo prospect, which contains recoverable resources of 774 mmbbls, is uneconomical.
There’s still a chance that Nigerian peer Seplat could make a firm offer to buy Afren. Seplat has already approached Afren and under UK takeover rules, Seplat has until 5.00 pm on 19 January 2015 to either announce a firm intention to make an offer for Afren, or announce that it does not intend to make an offer for Afren.
After today’s dismal news regarding Afren’s Barda Rash field, Seplat could decide to walk away. But with Afren’s shares trading at a six-year low, an opportunistic bid could be on the cards.
There's no guarantee that Afren will be rescued by a larger peer and for this reason alone I would stay away. But don't just take my word for it. You should always conduct your own research before making a trading decision.
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Rupert Hargreaves 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.