GKP v AFREN.

Having invested in both in the past, currently I am in Afren and not GKP, but have been thinking for a while about the GKP bond raising that happened just over a year ago..

For those not familiar with it, GKP were fast running out of money and had to issue bonds to meet short term liquidity requirements and for 12-18 months of further exploration. It was very much a do or die for GKP with a real chance of it defaulting on its existing bonds, if no new money was found.

Fast forward 12 months and Afren finds itself in a very similar situation. It has a few advantages, much higher oil production, larger range of assets and income from oil sales. But to be fair we are in a more hostile environment for oil producers now than 12 months ago, with lower revenues and vastly squeezed margins. At the time GKP was valued at the £1bn mark, currently Afren has a Market Cap of £100m.

Now I appreciate that it’s difficult to compare two companies like this, so to be honest I am not going to even try. However one fact does stand out, Afren is producing around $100m dollars of oil a month where as GKP was around $25m.

I think the main consideration is that this is quite a normal predicament for these kinds of resource asset heavy companies. They generally work out OK for shareholders.

Both companies are sitting in good positions for existing and immediate new shareholders, GKP has decided, to sell up. It’s done it nice and early before cash flow makes it seem like a bargain bucket selection. The share price has responded appropriately and you can almost guarantee that any price paid will be a minimum of 50% above the shares closing price today in my opinion.

Equally with AFREN, the selling by the risk averse institutions has created an opportunity for those prepared to take a little risk to make a nice return of 150-300% if decisions pan out how they should.