Davius - 14 Mar'09 - 13:49 - 23015 of 23097
There's no doubting that anyone watching on the sidelines has made the right decision, thus far. The slide in the share price has been frustrating and dramatic. Forced sellers, high liquidity, shorting, whatever. Steady selling, a weak oil price and terrible market, all have brought us to a market cap below £70m.
But Afren are, frankly, raking it in. Sales are running at around a million dollars a day, much of the oil price hedged and well into profit.
So why the concern? In a nutshell, the only reason that I can see is debt. Lots and lots of debt. In the current world climate, debt is not what investors want to read about. Debt overshaddows everything, cash flow, profits, assets. It's a dirty word.
So on first glance, a debt level of $430 against a market cap well under a quarter of that would send many investors scurrying away. But as previously mentioned, sales are steady, profitable and hedged. And Afren have been quite clear about cash generation and indicate that at current production levels they expect to reduce debt by $105m to $325 during 2009. $105m? That’s £75m at current exchange rates, more than the market cap of the company! That the debt is ring fenced against assets, and current production not only servicing the debt but also providing very healthy profits, debt should no longer be viewed as a reason to avoid the shares.
If the business ticks along with no expansion, no further wells, no production increases and little appreciation in the price of oil, it will be debt free in four years and on a prospective P/E of under 1. That won’t happen of course, the oil price will move, investment will continue (Ebok may require another hefty rise in debt) and production will probably rise.
Personally, I’m disappointed at having bought in already, as the current share price is below my purchase level and I could now buy more shares for the same initial investment. But on any fundamental view I’m very happy with my shareholding, which seems to be offering me a solidly profitable company at an unrealistically low price.
And that's not even touching on the potential from Ebok.
Sunday, March 15, 2009
Good Post - Davius - ADVFN
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