Why Afren Plc Is On The Brink Of Collapse

Afren (LSE: AFR) is down by as much as 10.9% today, as the oil producer appears to be on the verge of a default on its debt. As such, it is in talks with its largest bond holders regarding the immediate liquidity and funding needs of the business which, in layman’s terms, generally means that its short term future appears to be somewhat bleak.

Takeover Collapse

Of course, investors in Afren had hoped that talks with Nigerian oil company, Seplat Petroleum Development Co, would lead to a combination of the two firms and that this could secure Afren’s short term liquidity needs and also provide it with a bright long term future. However, talks were ended late last week, with Afren apparently stating that it believed that the proposal from Seplat could not be implemented on satisfactory terms, with the offer apparently being below the value of the company’s debt pile. As such, it is now in the same position as it was prior to the talks, with two credit ratings agencies warning that there is an imminent risk of default.

Cash Injection

Clearly, Afren’s current situation has not come about overnight. It required a cash injection of $200m just last month and is seeking to recapitalise, as well as renegotiate payment terms with its lenders.

However, the chances of it being able to raise further monies are likely to be slimmer than they were in January, since back then there was hope regarding a possible deal with Seplat (talks between the two companies commenced in December) and, from a stakeholder perspective, keeping Afren afloat in order to make a deal possible seemed like a logical move. Now, though, Afren may find it tougher to make deals with equity and bond holders, simply because a relatively appealing exit route seems far less likely.

Looking Ahead

While it is impossible to accurately predict the outcome of the discussions between Afren and its stakeholders, its short term future appears to be bleak. As a result, there is a considerable chance that it will cease trading and, as mentioned, two ratings agencies believe that there is an imminent risk of default.

Prior to the news regarding an end of the talks between Afren and Seplat, there was a clear reason to buy shares in the company, with a tie-up between the two companies having the potential to push Afren’s share price much higher. However, with this opportunity now seemingly gone, Afren seems to be too risky to buy at the moment and, unless another bidder comes in or it receives a substantial cash injection (both of which seem to be relatively unlikely) then things could continue to get worse for shareholders in the company.

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Peter Stephens 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.