Fears about the fallout from oil’s recent plunge left Afren among the sharpest fallers on Wednesday.
Afren lost 5.7 per cent to 39.4p after Oriel Securities downgraded to “sell”. The stock had been supported over the past month after Nigerian peer Seplat said it had proposed a merger, as well as by regular reheats of speculation that key shareholder SAPetro might make a counterbid.
But Oriel reckoned that, with Afren’s Nigerian tax break expiring in 2016, cash flow from current assets would not be enough to pay down debt.
“We are not convinced there is much equity value in Afren at $60 oil and still see it as limited at $80,” the broker said.
Afren could sell fields such its Ogo discovery in Nigeria and its Kurdistan acreage to prop up its balance sheet, Oriel said.
But if oil remains at about $60 a barrel, Ogo becomes uneconomical and Kurdistan would have a value of no more than $700m, equivalent to just 40 per cent of Afren’s debt by 2020, the broker forecast.
“From that perspective, the company has one of the worst defensive positions among its peers and we could see a scenario where the shares could lose the majority of their value (that is, no equity value) in a prolonged period of $60 Brent,” Oriel said.
The wider market broke a three-day losing streak, lifting the FTSE 100 by 0.8 per cent, or 53.32 points, to 6,419.83.
Arm Holdings, a sharp faller on Tuesday, recovered 3.6 per cent to 977p.
Some dealers pinned the earlier weakness on hype from the Consumer Electronics Show in Las Vegas, where Intel showed new chips for handheld gadgets and said it was number one by market share for high-end tablets.
While recent adoption of Arm’s top-end chips has met rather than beaten forecasts, the dollar’s strength against sterling has a bigger positive effect on earnings, said Morgan Stanley.
J Sainsbury reversed an opening gain to end 2.1 per cent lower at 229.6p following a mixed third-quarter update.
Like-for-like sales over Christmas beat expectations but management guidance was cautious, suggesting a continued deterioration in the current quarter.
Boohoo, which floated in March at 50p a share, slumped 42.5 per cent to 22p after warning that recent sales growth was half the expected rate.
It blamed aggressive discounting among UK rivals following the warmer than expected autumn.
Drug developer Vectura, which on Monday signed a licensing deal with a Johnson & Johnson company, jumped 5.1 per cent to 143.8p on more than six times the average daily volume.
Vectura was last year said to be among potential takeover targets for Novartis.
Nanoco, the developer of quantum dots for high-definition televisions, bounced 7.4 per cent to 120p after US rival Nanosys backtracked on claims that it had made a day before about Samsung using its technology.
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