The fall in Afren’s (LSE: AFR) share price over the last year has been quite astounding. In fact, it is now worth less than 2% of its value from one year ago, which is clearly hugely disappointing for its investors.
Certainly, this fall has been prompted by a declining oil price which has wiped £billions from the values of oil producers across the globe. And, looking ahead, the prospects for oil seem to be rather downbeat, with a supply/demand imbalance set to continue over the medium term and keep oil trading at a fraction of its previous $100+ level.
Financial Strength
As a result of oil’s expected weakness, financial strength is quickly becoming a major consideration for investors in oil companies. This makes sense, since profitability is being hit, write downs are substantial and there is a good chance that things will not improve all that much for a number of years, thereby making survival the biggest and most important consideration for investors.
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This, then, is a key reason why Afren’s share price fall has been so large: the company has net debt of over £800m at the present time and is struggling to repay it. In fact, Afren needs major refinancing for the long run, with its current financing appearing to be inadequate to last over the medium to long term. As such, investors are fleeing in favour of more financially sound companies and, while this is the case, Afren’s share price could come under more pressure.
Other Options
Another challenge facing Afren is that there are a number of other resources companies that offer huge long term potential at a relatively low valuation. Therefore, Afren is not in a particularly strong position when it comes to negotiating for additional finance.
Inevitably, other oil companies have struggled with their finances, too. A notable example is Genel (LSE: GENL), which has seen payments for oil exported from its major focus of operations, Iraq/Kurdistan, delayed by the political uncertainty that is present in the region. Although a payment plan is now in place and regular payments are anticipated, Genel still has a very wide margin of safety that indicates it could be worth buying. In fact, Genel has a price to earnings growth (PEG) ratio of just 0.2, which indicates that, while risk is relatively high, the potential reward is also significant.
Other Resources Stocks
Of course, not all resources stocks have had such a challenging period. For example, silver miner, Fresnillo (LSE: FRES), has seen its share price fall by just 9% in the last year even though its profit fell by 81% in 2014. That’s at least partly because the market is looking ahead to exceptional growth over the next two years and, with Fresnillo having a PEG ratio of only 0.2, it appears to offer considerable capital growth potential, as well as having a debt to equity ratio of just 35%.
And, for investors seeking a development-stage company rather than a producer, base metals company, Amur Minerals (LSE: AMUR), appears to have very bright prospects. In fact, it was recently awarded the licence at the Kun Manie project in Russia, which continues to boost investor sentiment in the stock. Certainly, there are a number of challenges ahead for Amur as it seeks to put together sufficient financing to fund the project, but it could prove to be a potential takeover target over the medium term.
