12th Jan 2015 10:23
LONDON (Alliance News) - Shares in FTSE 250-listed oil and gas explorer Afren dropped by around a fifth on Monday morning, hitting a near six-year low, after the company said it is considering its options for the Barda Rash field in the Kurdistan region of Iraq after the reserve estimate for the prospect was revised down substantially.
Afren, which has operations in West Africa, East Africa and Iraq's Kurdistan region, said an updated competent person's report on the Barda Rash field is expected to show a material reduction to its previously-published estimates on reserves and resources. The explorer said it expects the total reserve estimate for the field to be revised down to 250 million barrels of oil from 1.24 billion barrels previously.
The downgrade has been made due to the reprocessing of 3D seismic surveys undertaken in 2012 and processed in 2013, alongside results of its most recent drilling campaign. The reservoirs have not performed according to previous expectations, Afren said, while the wells have encountered higher water cuts than expected, and the company has seen operational challenges associated with drilling complex fractured reservoirs.
Afren said it could potentially achieve production from the reservoirs, but only by implementing recovery schemes that would require significant capital expenditure. Afren said doing this may be appropriate for a company with a different strategic focus to its own, indicating it does not intend to follow this route.
It echoed this warning on the deeper Triassic Kurra Chine reservoirs. Though recent drilling results at the site indicated the presence of light oil accumulations, these have a high level of associated hydrogen sulfide, which would also required a large volume of capital expenditure to develop.
As a result of the downgrade and the expense involved in developing the field, Afren said it is now considering strategic options for Barda Rash, though it said it would complete its commitment to finish testing on the BR-5 well at the site. It did not define what those strategic options being considered would include.
"We are naturally disappointed with the report and will now consider our strategic options for Barda Rash. Meanwhile, we will continue to focus on our core portfolio in Africa and allocate capital to our highest cash return projects," said Afren Interim Chief Executive Officer Toby Hayward.
Afren shares were nailed to the bottom of the FTSE 250 on Monday morning, down 20% at 31.36 pence. It is now the smallest stock in the index by market capitalisation.
The fall in its share price comes as the company holds talks over a possible takeover by SEPLAT Petroleum Development Co PLC, a Nigerian oil company. SEPLAT confirmed it had made a "highly preliminary" approach for Afren last week. It confirmed a statement made by Afren in December that it had entered into talks with SEPLAT.
Neither company has provided any financial information on any possible deal last year.
Afren's emergence as a takeover target has come the wake of a collapse in its share price in the second half of 2014. Its share price fell around 70% over the course of 2014, first dragged sharply lower by a payments scandal involving its former chief executive and chief operating officer and then exacerbated by the falling oil price towards the end of the year.
The payments scandal effectively came to a close for the company on January 2, when it said it reached a settlement with its former CEO, Osman Shahenshah, and former COO, Shahid Ullah, over payments the pair received which were not authorised by the company.
Afren fired both Shahenshah and Ullah back in October, having initially suspended them in July after the payments came to light following an independent review.
Under the settlement, Afren said it will receive a total of USD17.1 million in cash from Shahenshah and Ullah, along with a further USD3 million in respect to the costs to the company related to independent reviews carried out by Wilkie, Farr & Gallagher and KPMG, as well as some legal costs.
By Sam Unsted; [email protected]; @SamUAtAlliance
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