Oil & Gas Africa: Struggling Nigeria’s Afren May Turn To Beijing

March 16, 2015

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African oil and gas trade aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your risk in the weeks ahead. Let’s see what’s happening out there.

Afren goes into default

Struggling Nigerian oil company Afren is defaulting on an interest installment on its 2016 notes after a 30-day grace period for a missed payment ended in early March.  The amount owed to creditors is $15 million and Afren is still looking for a solution to its looming insolvency after rebuffing a takeover offer by rival Seplat.

In a statement Afren provided a warning to shareholders that any solution to the moribund company’s problems will likely, “substantially dilute the interests of the company’s current shareholders.”

Currently, Afren has operations in eleven countries across Africa and the Middle East including Kenya, Tanzania, Seychelles, Ethiopia and Madagascar.

As reported by AFK Insider in late February, Seplat proposed a merger between the two companies on news that Afren had cash flow problems after leveraging itself to the hilt.

When oil prices collapsed Afren was left in a vulnerable position and Seplat, which had just listed shares in the UK and was sitting on $500 million in capital, made a play to buy the company.  However, that deal fell through as Afren said Seplat’s offer was “significantly below the aggregate value of the debt of the company.”

At the moment the default on the $15-million interest payment is not expected to result in an immediate obligation to repay its 2016 notes or impact other issues scheduled for repayment in 2019 and 2020.

Afren says its largest bond holders have indicated to the company that they have no immediate intention to take action as they have the, “hope and expectation” that terms of a consensual restructuring would ultimately preserve value for all Afren stakeholders.

Chinese money

Although there is speculation that other Nigerian players like Oando and Lekoil, might also make a play for the struggling firm, the latest hint as to Afren’s fate comes from its Liberian founder, Ethelbert Cooper.

On March 5th the Financial Times reported the entrepreneur as saying that he was “leading an effort to reinvent the company as a new China-Africa platform.” Cooper also noted the company clearly needed new direction and that heads would likely roll at the top.

“With a different strategy and reinvigorated management there is a chance to pull the phoenix from the ashes,” Cooper said.

To survive, Afren needs to bring in some $300 million in financing to keep going and to give bondholders hope of recovering the $863 million it owes.

Most likely this will take the form of new equity issues as Cooper said that a key mistake in the run up to the current crisis was to load up on debt, which left Afren exposed when the high-price tide finally ran out.

This was a sentiment echoed by Labi Ogunbiyi, a member of Afren’s founding team and former director, who told FT that “at the time when we had very little to sell, no production and few assets to buy it was excellent to raise debt. But when we had production, we should have tapped equity.”

But will Beijing buy?

If Cooper’s plan succeeds and Chinese investors buy into Afren the resulting deal would be the Africa-China partnership in the oil and gas sector listed in a major western financial center like the UK.

However, the question remains as to whether Chinese money can be lured in.  At present, China’s big three energy companies:  CNOOC, Sinopec and CNPC are all facing significant cost pressures.  CNOOC, which focuses on offshore hydrocarbon plays, has decided to cut its 2015 capital expenditures by 30 percent while CNPC has said it will resort to “revolutionary measures” to cut costs.

Rival Sinopec, in turn, has also been keen to cut amid the slump.

Another roadblock to Afren’s long march to China is the plethora of deals Chinese companies are likely to come across as prices remain low.  Russia, for instance, is reportedly considering granting Chinese investors over 50 percent stakes in oil and gas fields as its economy falters in the face of low oil prices.

“If there is a request from China, we will seriously consider it. And I see no political obstacles at the moment,” said Russian Deputy Prime Minister Arkady Dvorkovich recently.

The two countries have been working hard to increase cross-border investment and last May Russia’s Gazprom and China’s CNPC signed a 30-year, $400-billion contract to supply 38 billion cubic meters of gas per year to China.

Other places beckon, too.  CNPC is deeply involved in South Sudan’s oil sector and is the biggest investor into that country.  CNPC has also invested heavily into oilfields in the southern part of Iraq, where the company has thousands of workers.  Then there is Argentina, which saw Sinopec recently come to an agreement with YPF to work the vast Vaca Muerta shale oil fields – where Argentine prices controls now guarantee breakeven revenues.

Chinese firms are also thought likely to be given a slice of Abu Dhabi’s onshore reserves.  Bottom line: there are lots of places for China to invest if it simply wants to get oil and gas out of the ground and an ailing African oil company, especially one as debt-laden as Afren, might not be the best place to put their money.

Geopolitics to the rescue?

Fortunately for Afren, China’s big-three oil companies aren’t merely profit-making enterprises as their counterparts in the West are.

Their upper management is wholly comprised of communist party members beholden to the leadership in Beijing while their status as parastatals in turn makes them instruments of China’s national interest in addition to resource-extraction firms.

Given Beijing’s crusade to expand China’s influence in Africa, it is very likely that more than the pure bottom line concerns will come into play when China’s big three energy firms, or any other large economic actor in China for that matter, consider whatever plan Mr. Cooper may present to them.

That’s because the decision makers in Beijing have made Africa a key part of China’s foreign policy for the simple reason that there are few other places to go.  Commodity prices may be down of late, but the reality is that if China is to continue growing, even at a much-reduced rate, it needs resources, and resources of the quality and quantity China needs in the long run are likely only to be found in Africa.

Thus, short-term investment into Afren may not make sense given its tremendous debt, but long-term the chance to snap up what until now had been an up-and-coming indigenous African oil player will likely be too much to resist.  After all, Afren would give China yet another platform from which to hunt for African resources and, importantly, give it an ostensibly African face, Ethelbert Cooper’s, with which to do it with.

Source: AFK Insider

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