Faced with insolvency, and with cash and investor confidence rapidly draining, the company conducted an "exhaustive process to find alternative sources of funding" earlier this year with its financial adviser Morgan Stanley. That process drew six indicative offers - including one from Lagos-based Seplat - though none of the prospective third party deals were deemed viable, given the need for significant debt restructuring.
In May, the company was thrown a lifeline from its bondholders, who agreed to a debt-for-equity recapitalisation plan. That highly complex restructuring was finally presented to shareholders after the stock market had closed on 19 June. It is being billed as a chance for the company and the equity holders to "start afresh", though in effect it is the only hope the company has of avoiding administration. As to how long this fresh start might last, that is in serious doubt.
Shareholders now have until 22 July to vote on the plan and a proposal to raise $75m in an open offer, half of which will immediately be used to pay debt. The deal is exceptionally complex, and involves massive dilution of existing shareholders to reduce bond holder debt by $233m, for which noteholders will be compensated with several tranches of equity. The myriad lawyers and other professional advisers now involved in the restructuring mean it will cost $63m just to go ahead. That's an exceptionally expensive lifeboat for such choppy waters ahead, as the slide below shows:
The restructuring is going ahead whether or not the company gains the 75 per cent shareholder approval required to back the proposals. Whether either scenario leads to anything resembling a fresh start is debatable, as the company will still have numerous serious problems. But in a bid to convince shareholders of the virtues of restructuring, Afren has visualised the debt profiles of either outcome (below). Both are highly theoretical, as the next two years are unlikely to be straight-forward, and may not even be in the company's hands.
A 'yes' vote, Afren claims, "de-risks the forward equity position". To try and get a sense of why this is, we spoke to chief executive Alan Linn, an oil industry veteran who joined in April tasked with saving the company.
You are asking shareholders to back the restructuring. What is your pitch to them, and why should they have faith in the company?
I looked long and hard before I joined Afren myself, but the thing that attracted me were the assets. In the industry we look very hard to get good quality assets and competitive commercial terms; Afren is not a high-risk play with a 10 per cent chance of exploration - it's a broad, high quality portfolio of assets. The thing that's really holding it back at the moment is the lower oil price, and making sure we've got a lower cost environment. The fundamentals of the company - the assets in the ground - haven't changed.
A lot went on, underpinned by a risky funding structure. If you kept revenues up you could pay down the debt, but Afren is suffering because of the oil environment, and shareholders have taken a hammering from that. We are putting all our efforts as quickly as we possibly can on turning that around, I'd like the shareholders be part of our future. I can't change the past, but I do think it has a strong future.
We've lost a lot of money and I'm really upset about that, and there's a lot of emotion out there. I've met some shareholders who don't care about residual value, and want to see us go out of business. But when you step back, there is some residual value, hopefully at the bottom of the cycle where some of those losses can be recovered, and I want our shareholders to be part of that story. If they choose to vote against the restructuring, and against bringing new money into the equity, the restructuring will go ahead regardless, but the existing shareholders will have no further value.
Why did the board decide to resign?
The board recognised the company needed to move on without them, and that there was an issue in them staying on. I think that was a sensible move and that they did the right thing. They had to see this company through to the point where it had a future, which meant getting the financing structure in place, but they've all made themselves firmly available to me if I need them, and they remain accountable for the prospectus.
The open offer is not underwritten. Is that not a red flag to shareholders?
The restructuring is effectively underwritten by our existing bondholders. The reason the bondholders came in and offered the restructuring was that if we didn't move ahead, we would be insolvent, and they would have been picking up the pieces afterwards. To recover their value, which they'd also lost, they needed to make a further investment, and they are injecting additional funds into the business.
There's probably about 45 per cent of the bondholders who make up the ad hoc committee who are committed to putting additional funding into the business, though they are not subscribing to the open offer. They were the ones who had additional risk, and the different benefits these bondholders will receive reflect the commitment they have made.
Post-restructuring, the company will still have huge debts of around $1.5bn. Are you not just kicking the can further down the line?
There's a debt that has to be worked out. I'm not Greece; I'm not going to default. I looked closely at what Afren can become before I joined, and there are a lot of contingent resources. Taking account the volumes we can generate, and if the oil price is relatively kind to us, we can move the business forward. Afren can be profitable at $50 a barrel, but $65 would not be a bad place to be, as we're then able to pay down our debt.
The prospectus says there will be enough working capital for the next 12 months, even after the restructuring proceeds. Does this mean further restructuring or cash calls?
This is a worst-case scenario, which we have to list as a contingency. The bondholders clearly don't believe the plan will fail, otherwise they wouldn't be going ahead with it. We are working on the basis of a rising oil price, and the implementation of cost-cutting.
One of your outstanding litigation claims is for "in excess of $104m". Is this liability, not a major concern?
I'm not worried about it at all. Even when you're running a business effectively, you will always have some disputes, which may settle in arbitration, or sometimes end up in litigation. So these numbers are always at the wild end. The thing with that claim in particular [from West African Ventures] is we had to stop because we ran out of money - and part of my job is to get the money back up and running. We're on $50 oil at the moment, and we need to sequence our projects, as part of that is we would re-profile the contractual arrangements we have in place to ensure our contractors undertake the work, and resolve the dispute.
What is the general sentiment among shareholders?
It's one that's difficult to get a reading of. If our shareholding was 25 institutions, I would quickly get a sense of the overall voting intentions, but the reality is that our shareholding is largely retail. Some came in at a very low price, and others have bought in at a very high price, so there's going to be a lot of personal preference which is difficult to engage.
All we can do is present the arguments for continuing shareholder engagement as much as we can, and remove the emotion from it as much as possible. I think the recent board decision was a big part of that. I am very keen for them to vote 'yes' because I really want them to have a say in the business going forward.
