The following article ran on Alliance News Professional on Friday, July 17. It is an example of in-depth reporting by Alliance News journalists.
Late on Tuesday, July 21, Afren confirmed it will postpone the general meeting due to be held on Friday.
LONDON (Alliance News) – The future of Afren PLC looks even murkier and uncertain following news on Wednesday, July 15, that the company’s shares have been suspended after a fall in production threatened its already controversial and much-debated restructuring plans.
The news has thrown doubt on whether a general meeting next Friday, at which shareholders are due to vote on the company’s proposed debt-for-equity swap with its bondholders, will go ahead.
Afren’s bondholders had already injected USD255 million of funding into the company back in April as part of a wider recapitalisation, which is now in jeopardy after Afren said near-term production in Nigeria is set to be “materially lower” than forecast when the plans were drawn up, causing financial uncertainty.
Afren previously had said it expected to produce between 29,000 to 36,000 barrels of oil per day in 2015, but admitted this week that it has “become clear” the company won’t achieve the target, meaning it can not accurately inform the market about its financial position.
The company did not state the reason why production has faltered. However, it did state in its annual general meeting statement in June that revenue was hit by a net profit interest liability, which began in the fourth quarter of 2014.
“The fall in revenue was due to lower realised oil prices and production liftings from Ebok utilised to settle a net profit interest liability which is part of the agreement,” Afren said.
As a result of the production fall, Afren is seeking a further USD30 million in net cash proceeds from bondholders on top of the current restructuring proposals, and it was talking to “other stakeholders” about the potential implications on the proposed restructuring, including its timeline.
It is a stark reversal of the company’s statement in its supplementary prospectus in June, when it said “there has been no significant change in the financial or trading position of the group since March 31, 2015.”
However, some media outlets have suggested the news on Wednesday, only a week before the shareholder meeting, actually implies a wider problem for the company’s Nigerian assets, which could be put at risk by the restructuring.
Reuters cited First Energy analyst Stephane Foucaud on Wednesday saying that if bondholders force Afren to default on its debt, which will happen if shareholders reject the plans, its oilfield licences in Nigeria could revert to its partners or back to the government.
“If the company is owned completely by the bondholders, it loses its connection with Nigeria and Nigerian shareholders,” said Foucaud. Nigerian law requires assets to be owned or partially owned by indigenous companies.
The Afren Shareholder Opposition Group (ASOG) is a group of around 600 members claiming to have over a 10% stake in Afren. It is led by four committee members who are urging shareholders to vote against the proposed wider restructuring.
A week before the news on Wednesday, ASOG committee member Peter Brailey told Alliance News: “The interesting dynamic to this is that the bondholders have share pledge… Can they implement those share pledges without triggering the potential for the Nigerian government to reallocate assets?”
If the Afren meeting does go ahead as planned next week, shareholders will have a choice between the Yes vote, resulting in a significant dilution for shareholders to a stake varying between 8.5% to 15%, dependent on the uptake of a subsequent open offer, or a No vote, which will lead to the sale of Afren’s assets.
Under the Yes vote, Afren will enter a scheme of arrangement and will issue approximately USD369 million of new high-yield notes due August 2017 to refinance and repay substantially all of the Bridge Securities loan facility provided by an ad-hoc committee of bondholders and provide an additional USD148 million in net cash proceeds to the company.
The new notes will carry an annual interest rate of 15%, comprised of 7.5% payable in cash and 7.5% payable in kind.
A quarter of the face value of the outstanding amount of Afren’s existing loan notes, being around USD234 million, would be released into equity, resulting in bondholders owning an 80% stake in the company, leaving existing shareholders with the remaining 20%.
The remainder of the existing notes would be struck off and reissued into two equal amounts of around USD350 million of new notes due in 2019 and 2020 carrying an annual interest rate of 9.1%.
Afren also then would issue new shares in the company at “nominal value” to the bondholders who subscribed to new loan notes. Afren has agreed to issue an amount of shares equal to 50% of the company’s share capital prior to the restructuring, which was 1.10 billion shares, meaning it will issue around 550 million new shares.
An open offer also would be launched to all shareholders and bondholders. That will comprise of up to GBP49.2 million, or USD75 million at 1.0 pence per share on a four-for-nine share basis.
However, that open offer has been capped so shareholders cannot own more than 15% of the company to ensure the bondholders don’t get too diluted.
Dependent on the take up of that open offer, shareholders in Afren would hold between a stake in Afren of between 8.5% and 15%. The bondholders, who can subscribe to any shares not taken up by shareholders, would increase their stake to 85% from 80%, as they will be awarded an extra 5% stake by writing off a USD5 million loan.
Afren also would extend the repayment date of its USD300 million Ebok facility until June 30, 2019, alongside another USD50 million facility until the end of June 2018.
“The vast majority of people say the Yes vote is far too dilutive and also transfers the capability of far too much control to bondholders,” said Brailey of the shareholder opposition group. “It is very much in favour of the bondholders to the detriment of the shareholders and in essence ASOG was formed to represent those views back to the company.”
A No vote, for which ASOG is pushing, would mean that the Ebok facility would not be extended, which would push up debt. The new loan notes would still be issued on amended terms but no new shares would be issued, meaning shareholders would retain 100% of the company but Afren’s assets would be transferred to the bondholders.
At the end of March, total assets stood at USD2.62 billion whilst total liabilities stood at USD2.45 billion. Afren has already written down a number of assets to no value on the balance sheet, including its Kurdistan oil reserves in Iraq following a material reduction to previously published estimates of reserves and resources in the region which were once worth over USD1.0 billion.
According to Afren, the company would take on around USD600 million more debt under a No vote and the interest rate on the new loan notes would be just under 27%.
Under the No vote, Afren has said debt will instantly increase by USD266 million with a further USD372 million of debt being piled on within two years due to the 27% interest rate.
The additional debt, which would be on top of an already substantial pile, likely would result in Afren defaulting on its loan and bond repayments, and trigger a sale agreement under the restructuring, leading to the sale “of all or substantially all of the group’s business by the end of 2016”, it said.
Those asset sales would have to cover the mountain of debt that Afren carries, and would essentially fall to its bondholders. Under a No vote, Afren would not need shareholder approval to sell the assets.
Afren is strongly advising shareholders to vote Yes, claiming it is the “the only route available to Afren” and that under a No vote, shareholders would be “unlikely to see any return of their current investment”.
The board of Afren, including Chief Executive Alan Linn, have outlined a plan for the company following a Yes vote. On a website dedicated to the proposals, Linn said Afren “has a real future and will return to growing shareholder value” and that the company “can recover from this difficult period and help our investors benefit from these efforts”.
There was confusion at the AGM, when shareholders signalled their intentions by voting against a resolution that would allow directors to allot relevant securities, the authorisation of directors for dis-application of pre-emption rights, and the authorisation of the company to make market purchases, which is a standard resolution for listed companies.
The company claimed shareholders believed they could block the restructuring by preventing the company issuing shares. If true, this would mean the company could not conduct the open offer. But Afren was quick to quash those ideas and said it would “re-engage with shareholders” to clarify the issue.
The AGM also saw a board exodus, as Chairman Egbert Imomoh and non-executive directors Toby Hayward, Patrick Obath, Sheree Bryant and Iain McLaren all left the company.
ASOG’s Brailey told Alliance News the AGM vote sent “a very clear message about the level of dissatisfaction amongst shareholders”. He also said it is a “matter of interest as to whether the EGM occurs in the way it is currently set out,” which looks more likely following Wednesday’s news.
Afren told Alliance News it “maintains a regular dialogue with shareholder groups including ASOG” and sees no opportunity for taking the company forward in the case of a No vote.
Afren management believes a No vote would lead to the ultimate end of the former FTSE 250 constituent and have said a Yes vote will provide upside to shareholders, arguing that, while shareholders will be significantly diluted, owning a share of something is better than 100% of nothing under a No vote.
Afren believes it is unlikely it would gain enough value from selling its assets under the No vote to cover its debt, meaning there would be no value for shareholders, as it would be a distressed seller suffering from reputational, political, and market discounts.
Earlier in 2015, UK-listed SEPLAT Petroleum Development Co PLC held talks with Afren about a potential takeover, but this was turned down by Afren as the offer was not deemed sufficient. “The exact terms of the SEPLAT offer are confidential, but Afren stated at the time of rejecting the offer that it was below the value of Afren’s debt,” Afren Chief Executive Linn had said.
ASOG’s Brailey firmly disagrees with the company, saying there is hope for Afren to become a “very interesting [exploration and production] company” by selling its producing assets and stripping the company back by utilising its exploration licences and the opportunity to farm-out those licences. But Brailey admits that the value of those assets is uncertain and selling them “a risk”.
ASOG would hope to sell the producing assets to cover Afren’s debt, leaving Afren with exploration assets to start again and rebuild.
Although ASOG is pushing for a No vote, this is not the aim of the organisation, according to Brailey.
“What we are trying to achieve is a better Yes option,” he said. “I think one of the key issues is that firstly the starting point [for existing shareholder equity] is too low, 8.5% is too low and having the absolute cap on the open offer has not been explained”.
“I, and the majority of shareholders recognise the bondholders stepped in with funding that kept the company alive,” he added. “We are not saying bondholders should put in that money and get nothing for it – that is not the view we hold. What we have always said is that it needs to be fair and viable. We see it as unfair.”
Before the revelation about production on Wednesday, Brailey was feeling confident about pushing through a No vote. Afren would need 75% of the turnout to vote Yes for it to pass, but both Afren and ASOG accept that the likelihood of every vote being cast is low.
That means the No vote campaign would technically need a 25% voting stake to block the debt-for-equity swap, but ASOG believes something above 17% could be enough dependent on the turnout.
Importantly, there has been no word from Afren’s largest individual shareholder, South Atlantic Petroleum, or Sapetro, which holds a 7.1% stake in Afren. Sapetro is led by a former Nigerian defence minister, General Theophilus Danjuma, who decided to attain the substantial stake when Afren’s share price plummeted.
Sapetro has its own operations in Nigeria, where Afren’s producing assets also reside. Afren confirmed it was in contact with Sapetro but said it had no indication as to how the company would vote at the EGM.
“At this point in time, and our view right from the start of this process is that we see the chances of the restructuring going through as it is currently presented as so slim, it is not a matter we spend time thinking about [the idea of a Yes vote]”, Brailey told Alliance News before the Afren’s announcement on Wednesday.
“The message we are delivering on behalf of members is that we are looking for a fairer and more balanced, viable restructuring,” said Brailey.
However, Afren said no new and improved offer would be made to shareholders in the case of a No vote.
“The company stresses that plan B will not lead to an equity or negotiation and plan B automatically leads to an alternative restructuring, the terms of which are outlined under the No vote under which the bondholders have security over the assets,” the company told Alliance News.
On the website, Linn reiterated that “there was no actionable alternative that provided a better outcome for shareholders, and without the funding from our bondholders, Afren would not be able to offer you, our shareholders, the opportunity to recover any value from our efforts to turnaround the business.”
In addition to the uncertainty and the opposition from ASOG, there is also a smaller group of shareholders, some of which also are members of ASOG, that plan on taking legal action against Afren.
The Afren Legal Action Group has told Alliance News that private-client lawyer firm Harcus Sinclair is spearheading its claims.
The Times newspaper on Thursday said the Legal Group has written to the City regulator demanding an investigation into whether the troubled oil producer was involved in “the withholding of material information”, asking the the UK Financial Conduct Authority to investigate whether Afren operated in “potential collusion with certain bondholders”.
The trust between shareholders and Afren is low and has been since former Chief Executive Osman Shahenshah and Chief Operating Officer Shahid Ullah were sacked in October 2014, after a review alleged they had received unauthorised payments from third parties.
That spoiled a restructuring plan that was to be signed only two days later, according to Afren, which was then compounded by the collapse in world oil prices.
At the end of October, when the CEO and COO were sacked, Brent oil was trading at around USD85 per barrel, falling to its lowest point since March 2009 in January at USD45 per barrel before recovering slightly to USD57 per barrel on Friday.
That failed deal caused huge liquidity problems, as cashflow dwindled and commitments spiralled, which forced the company to monetise valuable oil-price hedges for USD80 million in order to keep the company alive.
Although the sale of the hedges injected money into the business to keep operating and was necessary, it also deprived the company of the ability to sell 2.85 million barrels of oil at above-market prices.
Afren previously has said it sold the hedges to “guarantee the value” of them when prices were at a five-year low.
Although ASOG’s Brailey concurs that the hedge sale had to happen and it was a “timing issue”, he claims Afren should have released the news to the market quicker. The sale of the hedges was conducted in December but not announced until March.
“There were a number of [Regulatory News Service announcements] between when the hedges were sold in December and the March 13 RNS that declared the sale,” he told Alliance News. “The company should have declared it and had ample opportunity to do so.”
That long chain of events wiped away Afren’s equity value, as its share price fell by more than 98%. At the end of July 2014, Afren shares were trading at 148.8 pence before falling to 110.0p the day after it issued a profit warning.
Since then, Afren shares hit a low of 1.28 pence per share in June, and the stock was trading at 1.785p Wednesday when its shares were suspended.
In its latest interim results for the quarter ended March 31, Afren reported a USD48.1 million pretax loss, compared to making a USD55.8 million profit a year earlier, after revenue more than halved to USD130.3 million from USD269 million, compounded by administrative expenses rising to USD32.2 million from only USD6.4 million.
Finance costs also rose to USD34.2 million in the quarter from USD19.9 million a year earlier, and it booked an impairment totalling USD26.5 million. It had just over USD100 million in the bank.
ASOG’s Brailey told Alliance News: “It is certainly acknowledged by the ASOG committee members that the cash flow position that the company found itself in at the beginning of the year was really quite extreme given the scale of the company, so when the refinancing deal was discussed and put into detail for the bondholders, Afren were at that stage in quite a weak position cashflow wise.”
An announcement from Afren is due shortly and is expected to come before the planned EGM on Friday next week to inform shareholders whether or not the restructuring plans will go forward in their current form or even at all.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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