Is It Time To Give Up On Afren Plc?

2015 has been a disaster for investors in Afren (LSE: AFR), with the exploration company seeing its share price fall by 87% since the turn of the year. However, things could get much worse for Afren’s stockholders, with the company’s news flow continuing to be dire and showing that it remains in a precarious position.

Debt Default

The latest piece of negative news flow on Afren concerned the decision to default on paying the interest on its 2016 notes. The total that was due to be paid was $15m, with Afren stating in the news release that it is expecting to shortly reach a deal with creditors that would allow it to continue as a going concern. Although disappointing, the news was not wholly unexpected since Afren’s financial situation remains highly precarious.

A Potential Solution

Although a bid for Afren is still possible, it seems more likely that it will undergo a restructuring of its capital position that will essentially provide current debtholders with equity. This should allow the business to stay afloat in the short run, but will inevitably mean that existing shareholders see their stakes in the company severely diluted. As this appears to be the preferred option of the company at the present time, investors should be aware that buying now may see their holding in the firm become reduced if a deal with creditors is reached.

Looking Ahead

Clearly, Afren is in a desperate situation. In fact, while a debt for equity swap with creditors may seem like a very unappealing option for current equity holders, it may prove to be the case that this is the least worst option, since otherwise Afren may be forced to file for administration.

One saving grace could be the company’s asset base. It remains very appealing and is of a sufficient quality to mean that sector peers may be interested in buying some or all of it. This was the hope just a few weeks ago, with independent explorer, Seplat, in talks with the company but, realistically, Afren’s sizeable debt pile is likely to put off other potential suitors and, even if they are interested, the price they are willing to pay may not be particularly appealing to Afren’s shareholders.

So, while it is clear that Afren does have a number of positives, investing in it now does not seem to be a prudent move. Certainly, a bid could come in due to the company’s appealing asset base but, with the more likely outcome being major changes to its capital structure, now appears to be the wrong time to buy a slice of it.

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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.