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Should You Buy Afren Plc As Shares Surge Higher On Bid Hopes?

Afren (LSE: AFR) shares rose by more than 50% in the first half hour of trading this morning, leaving them around 65% higher than when markets opened on Friday.

Afren’s gains on Friday came after the firm revealed that that the UK Takeover Panel had agreed to allow bid talks with Seplat to be extended until 13 February.

However, this morning’s gains may also have been driven by a second statement issued by Afren, late on Friday evening, after markets had closed. In this statement, Afren confirmed it had agreed with its lenders to delay $65m of interest payments until the end of February.

Should you be buying — or is this a good chance to sell, before it’s too late?

The smart money is out

Big institutional investors are often criticised by private investors for their high fees and average results, but they do tend to have a good understanding of financial analysis and risk.

Two of Afren’s biggest institutional investors — Standard Life and SKAGEN Funds — have sold 107m shares in Afren since November. That’s equivalent to nearly 10% of the oil firm’s shares.

Who has bought those shares? We don’t know, but if any shareholders had increased their stakes above 3%, then Afren would have had to disclose this. This hasn’t happened, suggesting to me that smaller investors have picked up the shares in the hope of a rebound.

The harsh reality

Ultimately, Friday’s statements didn’t change anything: Afren still has no cash and is now effectively in arrears to the tune of $65m on debt interest payments, which have simply been delayed for a month.

It’s important to remember that debt repayments always take priority over shareholder rights: Afren is now effectively controlled by its lenders, and any solution to the current situation is likely, at best, to involve shareholders being heavily diluted.

Seplat may yet make a bid, but any offer is unlikely to be at a premium to the current share price, as there’s no need for this. Realistically, all Seplat would have to do to take control of Afren is to agree to take responsibility for Afren’s debt and funding obligations and perhaps make a nominal offer — below today’s share price — for the shares.

Shareholders would have no choice but to accept, because Afren’s lenders would withdraw their support if the offer was not accepted, leaving Afren in administration.

In my view, buying Afren shares in today’s market is complete speculation and very high risk: even in the troubled oil market, there are far better buys available elsewhere.

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Roland Head 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.