Afren getting finances in order

Two hours after the stockmarket had closed, and when most in the City had packed up and headed home for the night, Afren confirmed rumours that it was working on a financial restructuring. It also remains in talks with Seplat which may result in a bid from the Nigerian oil producer. We'll find out in nine days' time, and if nothing happens the troubled oil explorer better have its finances in order. Investors are clearly taking no chances, and the shares are marked down 17%.

"The company confirms it has been reviewing with its advisors its capital structure, liquidity and funding requirements," read a statement at 6.27pm Tuesday. "As part of that process the company is in discussions with its lenders regarding amendments to its existing facilities, in addition to seeking a deferral of a $50 million [£33 million] amortisation payment due at the end of January 2015.

"Given the rapid decline in the oil price the company is also reviewing its cost base and capital expenditure plans for 2015."

Earlier this week, Afren said that a deadline for Seplat to either launch a bid or walk away had been extended from 19 January to 5pm on 30 January. Seplat, named a bidder on 22 December, might easily be scared off by the possibility of more skeletons in Afren's cupboard or the scale of due diligence required to get a deal done. T5 Oil and Gas has already quashed rumours that it is about to gatecrash the party and launch a bid of its own.

Of course, the decision to refinance is perfectly sensible. Afren, rocked by scandal in recent months which ended up in both the CEO and COO being fired, last week slashed estimates of oil and its Barda Rash field in the Kurdistan region of Iraq. And there's a real possibility that Afren will not attract a bid, and the plunge in oil prices could cause it huge problems in the months ahead. If it does not act, the future looks bleak.

"There is a risk of breaching financial covenants (Net Debt/EBITDA less than 3) in 2015 if current low prices persist and we think material capex cuts should be expected," warns Westhouse Securities.

All will become clear a week Friday.

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.