Afren (LSE: AFR) shares fell by up to 66% in the first half-hour of trading this morning, after the firm revealed that shareholders in the Nigeria-focused firm are likely to face a £200m-plus cash call to plug a gaping hole in the firm’s finances.
The firm says it is seeking to delay $65m of interest payments and is in discussions with investors about issuing new shares to raise an amount “in excess of the Company’s current market capitalisation”, which was £195m before today’s rout.
What has gone wrong?
In a statement this morning, Afren says that although it did have $235m of cash on hand at the end of 2014, most of this was either restricted to meet operational requirements, or has since been used to fund capital expenditure that took place in the closing weeks of last year.
What this means, in my view, is that Afren was living from hand to mouth for most of last year. Every cent of operating cash flow was being spent on capex, and most of the firm’s debt facilities were already full drawn.
When oil prices fell at the end of last year, Afren’s cash flow fell too, leaving the firm unable to fund its existing commitments — hence the disappearing cash pile.
Should we have seen it coming?
I’ve looked back through the firm’s results for the first nine months of last year, and some of this should have been obvious.
The firm’s cash flow statement for the first nine months of last year shows that net cash from operating activities of $454.8m was completely swallowed up by $488.7m of capital expenditure, while some of its cash reserves were used to pay financing costs.
However, I don’t think the restricted state of Afren’s cash balance was made completely clear: oil companies usually specify how much of their cash is restricted. Afren didn’t, implying — in my view — that none of it was restricted.
Is Afren a recovery buy?
As I write, Afren shares are changing hands for around 9p. A bid from Seplat could still come through, and cause the shares to rise sharply in value.
However, I don’t think this is very likely. Seplat has no incentive to rush in and make a bid, and may instead choose to take control by taking part in the firm’s fundraising, or purchasing some of its debt.
Sell or wait?
If I’d bought shares at recent lows, as a recovery play, I’d be tempted to cut my losses and sell today. The outlook is just too uncertain.
Longer-term shareholders might as well hold, however, as they’ve lost almost everything already.
