Is it safe to come out yet? The collapse in the price of oil has been frightening enough for anyone reliant on drilling for oil, but Afren has been ahead of the curve — as if the curve wasn’t a bad enough place to be.
And just as some are daring to think that the oil price may have bottomed out, some hopeful punters may be tempted to bet that things surely cannot get much worse for a company that, when all is said and done, still has reserves of 162 million barrels of oil on its books. Looking at the details of yesterday’s refinancing, I wouldn’t be so hasty.
The company’s shareholders have been on a rollercoaster: the shares rose from 13½p in 2009 to about 170p by the end of 2013. Yet shareholders will be all but wiped out by the refinancing announced yesterday, which, to judge by the lurch downwards in the share price, still came as a shock to some. If the refinancing solved its fundamental problems, then climbing back on board would be excusable.
The recapitalisation plan includes a debt-for-equity swap, an extension of some debt facilities, the issue of new shares to some existing noteholders and an up to $75 million equity offering to all shareholders.
The company defaulted on its 2016 bond notes this month after missing an interest payment.
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The most striking thing about the refinancing is the voracity with which debt has devoured the meagre equity left on the plate by Afren’s hapless shareholders. Only $230 million of bonds — part of a $1.7 billion debt pile — whittles the shareholders down to 20 per cent of the company. An issue of new shares shaves that back still further.
So most of the debt remains there — a little further towards the horizon, but there all the same and looking angrier and hungrier than ever. About $863 million of bond debt has been turned into $690 million. Those bonds fall due in 2019 and 2021 and instead carry “payment in kind” interest of 9.1 per cent. That means that instead of the debt being serviced, it rolls over on a compound basis until another $321 million chunk of debt has been repaid. And so on.
After all this rigmarole, the shareholders have next to nothing and the creditors are still owed $1.7 billion. However, to offer a “sell” recommendation to an Afren shareholder under the auspices of advice is tantamount to the Irishman of politically incorrect lore who, when asked for directions, begins with the words: “Well, I wouldn’t start from here . . .”
So what should Afren shareholders do when this proposal is put to a vote? As one analyst put it yesterday, they are the turkeys being asked to vote for Christmas. Just as at Petropavlovsk, the heavily indebted Russian goldminer, they are being told to accept almost total dilution.
First Energy analysts even questioned whether the new cash injection would be enough to meet the $170 million of payables that are due.
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However, the alternative, as cast by Afren’s management, looks dire. If the shareholders fail to support the refinancing, the $230 million of bonds that were to be converted into shares will carry a punitive 20 per cent rate of interest. The new high-yield notes will accrue interest at a rate that would make a payday lender blush. The company will have to be put up for sale by the end of the year to avoid a default. Similarly, if the company is to avoid a default, the sale will have to avoid default by the end of next year.
In other words, the company becomes a forced seller. The likes of Seplat, which had an offer rejected by Afren this year, will be interested in the producing west African assets, if not the Kurdish assets. If this recapitalisation is better than the Seplat offer, it makes one wonder exactly how bad the Seplat offer was.
Shareholders tempted to reject the proposal and take their chances with a Seplat offer, though, should think twice. It probably wouldn’t do the deal solvently. Any shareholders still on board are truly over a barrel. And, to make matters worth, it’s a barrel that’s worth half what it was a year ago.
New emergency funding $300m
MY ADVICE Avoid
WHY The proposed new capital structure suggests that there is still more pain in store
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