Interactive Investor

Afren's Barda Rash reserves up in smoke

12th January 2015 13:34

Harriet Mann from interactive investor

Afren has lost over three-quarters of its value since the summer, hammered by a management scandal, terrorists on the rampage in Iraq and a plummeting oil price - brent crude is now just $48.54. Unfortunately, 2015 looks no better. An enormous cut to estimates at the oil company's Barda Rash field in the Kurdistan region of Iraq has wiped out a further fifth of its value and plunged the shares to a near-six-year low. What next?

An updated competent person's report (CPR) has essentially eliminated original 2P reserve estimates of 190 million barrels of oil (mmbbls) and shrank 2C resource guidance from 1,243mmbbls to just 250mmbls*.

After reprocessing the 3D seismic shot in 2012 and analysing its drilling campaign, Afren realised that the reservoirs have not performed in line with expectations, with too much water flowing in and difficult reservoirs creating "operational challenges". This means it's going to cost a lot to recover the oil.

VSA Capital estimates the value of Barda Rash in which Afren has a 60% working interest at 27p per share net to Afren. No wonder the shares have slumped. And it will need a company with deep pockets to make the field work.

(click to enlarge)

"We are naturally disappointed with the CPR and will now consider our strategic options for Barda Rash," said Toby Hayward who's been running the company since July when boss Osman Shahenshah was accused of accepting illegal payments, and sacked three months later. "Meanwhile, we will continue to focus on our core portfolio in Africa and allocate capital to our highest cash return projects."

"The board says that it is 'considering strategic options for Barda Rash' which is understandable but I wouldn't spend much time on it as there are bigger fish to fry with Barbarians at the gate and as yet, no new CEO, that can't come soon enough…" says industry expert Malcolm Graham-Wood.

In the nine months to 30 September, net production excluding Barda Rash reached 31,147bopd, below expectations. Afren has further exploration and appraisal projects in West Africa, East Africa and the Kurdistan region of Iraq, which VSA Capital reckons makes the company an interesting takeover target. At the end of last year Seplat made a preliminary approach to Afren and has until 19 January to either make a firm offer or back out.

Westhouse Securities says the cuts put Afren's capabilities under scrutiny:

"Such a material downgrade once again casts a shadow on operational capabilities of the company in its current state and its previous disclosures in respect of their assets. It is currently a subject to a preliminary approach from Seplat, however, there can be no certainty that an offer will be made (no details are known). We maintain our view that the best stock to play Kurdistan is Genel Energy (GENL LN; Buy)."

*2P reserves are proven and probable and more reliable than 2C reserves (the best estimate of contingent resources).

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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