Mid cap oil producer Afren (AFR) is in free-fall as an independent audit drastically downgrades the estimated resources contained within a key field. Down 19.6% to 31.6p today, in a little under six months the shares have surrendered nearly 80% of their value and not all of this decline can be attributed to the negative macro backdrop of tumbling oil prices.


Web chart - Afren - Jan 2015


In July (31 Jul) it was revealed chief executive officer Osman Shahenshah, and chief operating officer Shahid Ullah had been suspended pending an investigation into illegal payments associated with its assets in Nigeria - a scandal which eventually saw both men dismissed (14 Oct) - but this time it is the firm's acreage in Kurdistan, northern Iraq which is the source of its woes.

Resource estimates for its Barda Rash field have been slashed in devastating fashion. The company says it is considering strategic options for the project as an updated reserves audit eliminated gross proved and probable (2P) reserves of 190 million barrels of oil equivalent (boe) and slashed contingent resources from more than 1.2 billion boe to just 250 million boe.

Shortly before Christmas (22 Dec) Afren announced it was subject to a 'highly preliminary' approach from Nigerian peer Seplat (SEPL) but no further details have emerged in the interim.

Westhouse Securities, which rates the stock at 'neutral' with a price target (presumably in the process of being updated) of 90p, comments: 'Negative news for Afren. Such a material downgrade once again casts a shadow on operational capabilities of the company in its current state and its previous disclosures in respect of its assets. It is currently a subject to a preliminary approach from Seplat, however, there can be no certainty that an offer will be made (no details are known).'

SP Angel says: 'For us the issue isn't the reserves, although that is a concern, the issue for us is the contingent resources, and in light of recent troubles and unfortunately, we believe a review must be conducted publicly.'

Issue Date: 12 Jan 2015