Shares in Afren (LSE: AFR) are down a further 10% today and this brings the company’s decline in value to 93% in the last year. That’s a staggering fall and has been brought about by a slump in the oil price, doubts surrounding its oil reserves in Kurdistan, as well as major changes in its senior management team.
Together, these issues have caused investor sentiment to decline to a great extent. However, could Afren now be worth buying, with its shares seemingly offering bid potential? Or, should you steer clear in case there are further falls in its share price?
Debt Problems
Just this week, Afren has been downgraded by S&P to a rating called ‘SD’, which stands for ‘selective default’. That’s because Afren has agreed with its lenders to defer a $50m amortisation payment, delay repayment on a $300m revolving credit facility and also delay the payment of a $15m coupon that was due for payment at the start of the month. Clearly, the company is struggling to keep its head above water and, in the near term, there appears to be a significant prospect of it folding.
And, with Fitch also cutting its rating on Afren to ‘C’ from ‘B’ last week because it feels that it is unlikely Afren will be able to make the required repayments during the grace period, the short term prospects for the company appear to be rather downbeat.
Bid Potential
However, Afren is rumoured to be a potential bid target for Nigeria’s Seplat Petroleum Development Co. The two companies have apparently held preliminary talks, with Seplat securing around $1bn of refinancing in January which it is rumoured could be used to fund M&A activity. Clearly, the chances of any bid from Seplat (or anyone else) are a known unknown but, with Afren having a relatively appealing asset base, it could prove to be more enticing to sector peers than the market is currently pricing in.
Looking Ahead
While Afren’s future is extremely difficult to accurately predict, it could be argued that it is worth buying at the present time as a result of its bid potential. In fact, many investors may view Afren as something of a ‘binary’ trade, which could either soar, or crash to zero. As such, it is an extremely high-risk investment, but is one that could deliver an exceptional return and, as a result, it could be worth buying if you’re a risk-seeking investor.
