Afren Plc Jumps 30% As Talks With Seplat Get “Very Serious”

Afren (LSE: AFR) is pushing higher today after one of Seplat Petroleum’s (LSE: SEPL) key shareholders announced that merger talks between the two companies were getting “very serious”.

In addition, during the past few hours it has emerged that the bid deadline has been extended at Seplat’s request. The deadline has been extended by 13 days, to 5:00 pm on 13 February and this deadline can be extended once again if Seplat and Afren fail to agree on a deal.

Unfortunately, there’s still no certainty that Seplat will make an offer for Afren, or as to the terms of any offer.

Time is running out

Now the deadline has been extended, Afren’s shareholders face yet more uncertainty. Indeed, the company is running out of cash fast, and if Seplat does not make an offer soon, Afren’s cash reserves could run dry.

Earlier this week the company warned that it was in discussions with investors about issuing new shares to raise an amount “in excess of the Company’s current market capitalisation”, which was around £195m at the time the statement was issued.

Unfortunately, since issuing this statement, Afren’s market value has dropped to only £63m, indicating that shareholders face significant dilution if the company does go ahead and conduct a rights issue.

That being said, the company did have $235m of cash on hand at the end of 2014, although most of this was restricted to meet operational requirements, or has since been used to fund capital expenditure.

But with such limited resources and $65m of interest payments falling due within the next few weeks, Afren is getting desperate. It’s possible the company’s creditors could now take control of the company, as it is clear that Afren can no longer afford to support its existing debt pile.

And the last thing Seplat’s management will want to do is overpay for Afren. It’s likely that the deal is being held up while Seplat tries to establish a fair price for the company, which could be harder than it first appears.

For example, over the past year Afren’s production has fallen, the company has been forced to fire its chief executive along with three other executives for “gross misconduct”, and it turned out that there was almost no recoverable oil left at the group’s Barda Rash oil field.

All in all, Afren’s management has made plenty of mistakes over the past few years. Based on this record, any potential acquirer will want to undertake careful due-diligence of Afren before making an offer.

Buy, sell or hold

So, should you buy, sell or hold Afren following today’s development? Well, there’s still no guarantee that a deal between Afren and Seplat will go ahead and for this reason alone I would stay away. Indeed, if Seplat walks away from a possible deal, Afren is set to run out of cash within the next few weeks.

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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.