Indications emerged weekend that Afren Plc may be sold in bits as no company has agreed to acquire it because of its current financial crisis. Afren is an oil and gas company specialising in oil and gas exploration and production. Seplat had wanted to buy it over but withdrew its bid when it found out that the company was highly indebted. As at the time of going to press, it was not clear if the staff had been paid off or have had their appointments terminated.
Those who have working knowledge of development in the company told Vanguard that the shareholders of Afren are to be blamed for the current financial woes the company has been subjected to as the decision by its Board of Directors to put the company in administration could have been averted.
An analyst revealed to Vanguard that Afren has been forced into administration following its inability to close a $200 million funding gap deal caused by the drop in Brent crude prices. As it stands, stakeholders and customers of Afren stand the risk of losing millions of dollars of their stakes in the company.
For instance, in Nigeria, three banks that lent over $185 million (N31.45billion) to Afren stand the chance of losing this amount if the company goes ahead to sell its assets where the cash flow is not sufficient to repay the loans
How crisis started
Afren, which was valued at about 1.64 billion pounds ($2.56 billion) a year ago, has been hit by a slump in oil prices, the dismissal of top executives and the absence of proven or probable reserves at a key field in Iraqi Kurdistan. The company has since lost nearly all of its market value. The suspended shares of Afren closed at 1.785 pence on July 15.
The full scale of Afren’s funding crisis was first revealed in January when the company said it needed a $200 million (£132m) cash injection. In its bid to stay afloat, Afren tried to persuade shareholders to agree to a financial restructuring which would have substantially diluted their holdings. It had planned to appoint new chief executive, Alan Linn once the interim funding deal had been completed.
But the Nigeria-focused oil company’s woes started towards the middle of last year when prices started sliding. Having dipped as low as $45 per barrel in January 2015, they are currently hovering around the $50 mark. Afren’s struggles were compounded by the suspension and subsequent firing of chief executive, Osman Shahenshah, and chief operating officer, Shahid Ullah over the receipt of unauthorised payments last year.
Afren Plc said its board had decided to put the company into administration as it failed to secure support from its shareholders for a vital refinancing and restructuring plan. Vanguard gathered that Afren in the first quarter of the year, held talks with bondholders, banks and its partners on its possibility of meeting targets after the company cut its production forecast for the year earlier this month, just as its shares were suspended on the same day.
The board believes that all the possible routes have now been explored during the course of its plan to refinance and restructure operations which was subject to a strict timetable, driven by the company’s short-term liquidity issues. According to a statement by Afren on its website, “These discussions have failed to deliver support for a revised refinancing and restructuring proposal that would result in Afren being able to pay its debts as they fall due.
“As a result, the board has taken steps to put Afren Plc into administration and appoint Simon Appell, Daniel Imison and Catherine Williamson of AlixPartners as administrators. The relevant documentation will be filed in court during the course of the day. “Whilst the overall capacity of the assets to deliver field life production remains broadly unchanged, the near-term deferral of production revenues has undermined the immediate liquidity position of the business.”
Afren also ended takeover talks with Nigeria’s Seplat Petroleum Development Co Plc in February, 2015 and began defaulting on its debt payments, before agreeing to a $300 million funding lifeline from bondholders.
The deal, which was thought to be too complicated by analysts and investors alike, would have reduced existing shareholders’ stake to 11 per cent. As at January 7, 2015, Afren’s largest shareholder was Nigeria’s South Atlantic Petroleum with a 7 per cent stake. Standard Life Investments, another shareholder, cut its more than 8 per cent stake in Afren to 1 per cent in January this year.
Analysts’ views:
“The core issue of Afren has been governance and communication,” FirstEnergy Capital analyst, Stephane Foucaud told Reuters, adding that the company was far too leveraged and had misunderstood the risk profile of its Nigerian assets. Also Renaissance Capital Research, in its report made available to Vanguard said “Afren is in administration and in this note, we explore the possible implications for Nigerian banks. We conclude that Zenith Bank is in the most comfortable position, followed by Access Bank and then Stanbic IBTC.”
According to Afren documents, Nigerian banks have at least a $185mn principal exposure to Afren. Zenith Bank has $100mn (N17 billion) to OML26, $5mn (N850 million) to Ebok; Access Bank has $50mn (N8.5billion) to Okwok/OML113 (Aje), $5mn (N850 million) to Ebok; and Stanbic has $25mn (N4.25 billion) to Ebok.
According to Rencap: “From our discussions with Zenith management and Renaissance Capital’s oil & gas analysts, we believe that of all the banks with credit exposure to Afren, Zenith is in the most comfortable position. The asset is producing, located onshore, and has a low operating cost – which implies that its production economics still make some sense at currently low oil prices.
The February 2014 facility is primarily secured by a charge over Afren’s interest (via FHN 26 – the SPV) in OML26, and its cash flows. According to Zenith management, other Afren creditors do not have claim to OML26. We do not think Afren plans to sell this asset and our oil & gas analysts believe that its cash flows should be sufficient to repay the loan, valuing the asset at $114million.”
Rencap in the report, said: “According to Access management, it has a first-ranking lien on the Okwok and Aje fields, though we note that some of the bank’s claims are subject to counterparty consent. Both assets are offshore and not producing.
While most of the $50million was spent developing Okwok, Aje is expected to produce first, by late 2015; Okwok production could happen in 2016/2017. At $50/bl, our oil & gas analysts value Okwok negatively at -$161million and Aje at $45million, implying 90 per cent potential credit recovery for Access.”
Rencap further stated that Ebok is located offshore and is Afren’s largest producing field. Afren has a $300 million syndicated facility from a series of local and international banks on this asset. “While the loan was originally secured using Ebok reserves, cash flows and material contracts, the creditors’ rights were relegated via an inter-creditor agreement on April 30, 2015, when Afren secured life-saving interim funding of $200 million.
This implies that in a liquidation scenario, the providers of the interim funding have a superior lien to the Ebok creditors and bondholders. At a $50/bl long-term oil price and at 15 per cent WACC, our oil & gas analysts value Afren’s share in Ebok at $158 million unrisked NPV, leading us to conclude that the creditors would likely have to write off this exposure,” it noted.
In conclusion, Rencap said “After speaking to bank management teams and reading multiple documents on Afren, we think the devil is in the detail. We view the feedback from the banks as the optimistic scenario and note that there are legal and contractual technicalities that could cause significant losses with regard to exposure to Afren.”
Afren in administration:
The board has appointed Simon Appell, Daniel Imison and Catherine Williamson of AlixPartners as administrators and said it was working with its partners to continue operations. The administrators were appointed on July 31, 2015. The Joint Administrators are licensed in the UK by the Insolvency Practitioners Association.
The affairs, business and property of the company are being managed by the Administrators, who act as agents of the company without personal liability. According to Afren, ” For the avoidance of doubt, no other company in the Afren Group has appointed administrators or taken any other step to commence insolvency proceedings.”
About Afren:
Afren Plc is an international independent exploration and production (E&P) company with a Premium Listing on the London Stock Exchange and a constituent of the FTSE 250 Index. Afren is a dynamic, entrepreneurial organisation with a portfolio of world-class assets located in several of the world’s most prolific and fast-emerging hydrocarbon basins in Africa and the Middle East. Its activities span the full-cycle E&P value chain of exploration, appraisal and development through to production.
Its success depended on its ability to deliver long-term value for all stakeholders through a clear and consistent strategy, which recognises that its responsibilities go beyond operations. To leverage its track record of operational delivery and effective portfolio and financial management, its business has been strategically positioned into three core business units, Nigeria and other West Africa, Afren East Africa Exploration and the Kurdistan region of Iraq.
