Afren Plc Surges 75% So Far This Week: Is The Tide Turning?

Despite enduring a poor start to the week, embattled oil explorer Afren’s (LSE: AFR) share price has ignited in recent days and the business has gained almost 75% so far this week to around 12.5p per share.

Following the collapse of a mooted takeover from Seplat (LSE: SEPL) on Friday, Afren has stepped up discussions with its bondholders in what looks like the company’s last stand to stave off bankruptcy.

Investors are piling into the oil play in the hope of a successful rescue attempt, boosted by the firm’s relatively low valuation. Indeed, with Afren changing hands at rock-bottom P/E multiples of 5.5 times forward earnings for this year and 2.1 times for 2016, it could be argued that the explorer is worth a punt at current prices.

Crushing loan repayments coming into view

But I for one am far from convinced by this argument, with Afren still facing a monumental challenge in the coming days to avert total collapse.

The business managed to eke out a last-minute deal in late January to delay the immediate repayment of a $50m amortisation payment, as well as a $15m interest payment on a 2016 bond.

These are now due within the next fortnight, however, and with Afren’s value slipping down the plughole — shares have collapsed more than 90% since 2014’s peak of 165.1p — the firm’s lenders are likely to be running out of patience as the oil play slowly collapses under the weight of its debt pile.

Latest oil data pummels Afren’s profits outlook

And the possibility of any rescue package has been further undermined by worrying oil market data this week, putting Afren’s profitability forecasts under the cosh.

US industry analysts Pira Energy Goup reported yesterday that Saudi Arabia has raised average daily output to 10 million barrels, up from the Joint Organisations Data Initiative’s estimate of 9.71 million barrels per day in 2014. The world’s biggest oil explorer continues to bat away calls from the rest of OPEC to resuscitate prices by cutting output as it bids to cement its stranglehold on the market.

On top of this, latest API inventory data released today showed US stocks leap 14.3 million barrels last week, smashing forecasts of a 3 million barrel rise. EIA numbers last week showed stocks hit another record of 417.9 million barrels up to February 6, making the next release due this afternoon unmissable viewing.

In this environment it is hard to envisage Afren returning to earnings growth any time soon, a situation which I reckon leaves hopes of a rescue package almost certainly dead in the water.

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Royston Wild 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.