Good morning.

Afren (LON:AFR)

Share price: 8.0p (down 55% today)
No. shares: 1,108m
Market Cap: £88.6m

I don't normally report on the resources sector, but there are lots of interesting things going on at the moment - as the plunging oil price is throwing up risks, but also opportunities. So I will mention the odd one. The opportunities are going to be the companies that survive this period of low oil prices, where share prices could rebound strongly once the oil price is moving back up again. So cashflows, hedging, balance sheets, terms of bank debt & bonds, etc, are the crucial elements to consider right now.

Review of capital structure - the title of the RNS alone should be enough to frighten shareholders. Key points seem to be;

- cash is now tight
- negotiations are underway with providers of a $300m debt facility
- $15m of debt interest payments due on 1 Feb 2015 may be deferred
- bond holders are mobilising - have formed an ad hoc committee (to represent their interests)

However, the killer one is this;

"...there is an equity fundraising requirement which is likely to be significant and in excess of the Company's current market capitalisation".

So who knows what is going to happen next? It hinges on whether existing & new investors are prepared to stump up fresh cash for equity.

There is also ongoing discussions about a "possible combination", i.e. takeover, by Seplat Petroleum Development (LON:SEPL) , a Nigerian oil company which listed on the London market in Apr 2014, and has a market cap of £675m at 122p per share.

My opinion - when companies get into financial distress, effective control passes from the equity holders to the debt holders. If debt holders play hardball, then equity can end up being worthless (if they seize control by forcing it into Administration). At the very least, equity holders here are likely to be heavily diluted. Or it could go bust.

I'll be giving this one a miss. Although it might be worth another look once they have raised some fresh cash, but who knows what price that might be at? 5p? 3p? 1p? Massive dilution appears inevitable.

I think you would need to be a sector expert to even consider getting involved here, or just a gambler. It's a good reminder that, if the capital…

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