Africa and Middle East oil explorer Afren (AFR) ticked up 1% to 136.3p after announcing it had acquired a further 23.3% stake in Nigerian subsidiary First Hydrocarbon Nigeria (FHN) for $105.4 million and secured an option to pick up an additional 12.5% in two years time.


FHN was set up by Afren in 2009 as a minority joint venture with Nigerian partners in order to capture opportunities only open to indigenous Nigerian-owned firms.


At the time the company's top directors took 15% of FHN at a price of 13 cents per share. Under the terms of a transaction which completed in May, Afren bought 18 million shares in FHN at a price of $2.47 per share.


This latest agreement, to buy nearly 34 million shares at $3.10 per share, would bring the group's interest from 54% to 78% with the option to buy the further 12.5% at $3.31 a share.


The company also announced directors are now selling a 10% interest in FHN and using the proceeds to buy Afren shares on the open market – partially addressing corporate governance concerns which had been laid bare in the Financial Times last month.


The newspaper had reported that management could profit to the tune of nearly $23 million (on a paper basis) from the May increase in Afren's stake in FHN.


Westhouse Securities analyst Dragan Trajkov –who has a 'buy' rating on the stock and a price target of 160p –says the price paid is broadly in line with its own estimated value for FHN as a whole. This makes the deal 'neutral' from the point of view of valuation but he adds the option to buy in 24 months at almost the current price could be 'valuable to Afren shareholders' assuming the development of the OML 26 licence (FHN's core holding) progresses as planned.


On the directors move Trajkov adds: 'Although the damage has already been done in the public domain, in our view this is not a bad effort by management to at least salvage some of the lost credibility in the market following the FT article.'

Issue Date: 05 Jul 2013