Afren drama holds five sharp points for investors
There aren’t many corporate insolvencies that would make a good movie. But any scriptwriters out there wanting to emulate the success of the Enron film should read our coverage of Afren this week.
The story’s got it all: the CEO, COO and other executives sacked for taking back-handers from joint venture partners; a shadowy, super-aggressive hedge fund boss nicknamed Keyser Söze; even a Nigerian ex-general called Theophilus Danjuma.
All that is froth, however. The real drama for financial market participants would play less well on the big screen.
What destroyed a company that once symbolised a new, exciting nexus between London’s capital market and Africa’s burgeoning oil fields? That will take time to emerge, but we could start by looking at five things: not colourful, but gravely important.
One. Afren was listed on the London Stock Exchange. Yet a supposedly high standard of corporate governance did not prevent a corruption scandal claiming its top bosses.
Two. How much should oil companies hedge the oil price — and how soon should they have to tell investors if they change their policy? Afren was underhedged, in one shareholder’s view; then the oil price halved; and then it sold its hedges.
Three. If a company is struggling to pay its debt, should it have to give shareholders a chance to inject fresh money, before yielding the whip hand to lenders?
Four. Resources companies depend above all on technical estimates of reserves in the ground, and on how much of the commodity can actually be extracted. Some of the world’s smartest financial players, and Afren’s management, failed to spot that these were going badly awry.
Five. When Afren failed, investors said even its claims on its assets were shaky: the licences were only safe if Afren was still pumping oil. When that is the case, an oil company is a much flimsier thing than investors may imagine.