Nigerian and other investors expecting to retrieve any value from their holdings in Afren, the scandal-hit oil explorer that entered administration last week, are likely to be sorely disappointed.
People familiar with the company are predicting its stakes in key assets such as the Ebok and Okoro oilfields in Nigeria will be taken over by either the Nigerian government or its local business partners.
That pessimism is echoed in Afren’s bonds, which are currently trading as low as 2 cents on the dollar, compared with about 40 cents in June.
“There is a material risk that there might not be much to share at the end of the day,” says Stephane Foucaud, an oil analyst at brokerage FirstEnergy Capital.
Afren’s announcement last Friday that it had begun insolvency proceedings was the denouement of a complex, protracted drama that brought a once promising oil explorer to its knees. The Nigeria-focused company found itself at the eye of a perfect storm, dragged down by a collapsing oil price, corporate governance abuses and a mountain of debt.
The London-listed explorer had once looked like an African success story. Fields such as Ebok threw off cash, especially when oil was at $100, and retail investors piled into the stock. The company’s market capitalisation grew from $73m when it listed on AIM in 2005 to $2.6bn in March last year.
“It was seen as a highly credible producer which turned round the perception of Nigeria,” said one western energy banker.
Last year, the company’s prospects dramatically changed. In July the board suspended chief executive Osman Shahenshah and chief operating officer, Shahid Ullah over “unauthorised payments” that had come to light in an independent review.
The timing was dire. Afren was heavily in debt, but was just days away from signing a refinancing deal with creditors to relieve some of the pressure on its balance sheet. When the suspicious payments came to light, the banks balked.
In October, the company announced the results of an investigation by law firm Willkie, Farr & Gallagher, which found that Messrs Shahenshah and Ullah had struck a secret financing deal in October 2013 with Oriental, one of Afren’s Nigerian partners. Oriental had agreed to pay 15 per cent of cash flows from the Ebok field over four years to an entity registered in the British Virgin Islands and controlled by Messrs Shahenshah and Ullah. WFG said the two men used the funds to pay “extraordinary bonuses” to themselves. Afren’s board fired them for gross misconduct.
A new temporary chief executive, Toby Hayward, was appointed: but he lacked operational experience of the oil industry. “Afren went into a period where the business did not have clear leadership,” said a person familiar with the company.
Mr Hayward started searching for a saviour. Takeover talks were held with Seplat, a Nigerian oil group, but bondholders were reluctant to take the haircut that would have been needed to complete a deal and discussions were abandoned.
Afren’s string of bad news was becoming longer. In January, it admitted it had overstated its reserves in Barda Rash, an oilfield in Iraqi Kurdistan, reducing its highest estimate from 1.2bn barrels to just 250m.
The share price went into freefall. Having reached 169.30p in late December 2013, by January this year it had fallen to 4.20p. The stock fell again in March when Afren defaulted on a $15m interest payment.
But later that month, Afren’s fortunes briefly looked as if they might improve. The company agreed a recapitalisation plan with its lenders involving $300m of new funding by the end of June and hired Alan Linn, an oil industry veteran, as its new chief executive.
Boosted by $200m in emergency funding from bondholders, Mr Linn set about trying to right the ship. But he soon discovered Afren’s affairs were in an even worse state than previously thought. The cash crunch had led to project delays, so Afren’s near-term production was set to be much lower than assumed in the business plan that formed the basis of its bailout deal. Last month Afren came clean on the production issue and requested that trading in its shares be suspended.
Shareholders were due to vote in July on a rights issue and the issuance of new shares, key elements of the bailout plan. But Afren called off the vote, and told investors they would have to stump up another $250m to keep the company afloat. They refused.
“The bondholders had thrown a lot of money at the problem, but just ran out of patience,” said one person familiar with the company.
By last week, time had run out for Afren. On Friday it called in administrators.
In a statement it said that discussions with lenders, bondholders and partners had “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”.
Now, investors could be wiped out, say people familiar with the company. Afren’s negotiating position is weak because, unlike its partners, it does not own its underlying assets, instead controlling them through technical service contracts or so-called “farm-in” agreements.
“If you default in Nigeria, the assets go to the government or to the indigenous partners who have the licence,” said FirstEnergy Capital’s Mr Foucaud.
Guy Chazan, FT