Investing: The Things We Tell Ourselves

I have a friend. An investor friend. He used to do research and wrote research papers but now he paints houses, and does other odd jobs. That is, while he’s not investing.

The first time I knew about his investing was when, with a paintbrush still dripping with Farrow & Ball blueish green paint called ‘Pale Powder’, he said, “Afren.”

I said, “but Afren, are you sure?” He then proceeded to list me reasons ranging from the conflicts in the middle-east to the management of Afren with such confidence I was amazed at how sure he was.

“What about the fall in oil price, the overproduction?” I asked, and this was back during the autumn of 2014, I remembered the brown leaves were all over the pavements, and the price of crude was still above $60.

According to the OPEC monthly report in November 2014, non-OPEC oil supply was estimated to “grow by 1.68 mb/d in 2014. In 2015, non-OPEC oil supply is projected to grow by 1.24 mb/d. The US, Canada, Brazil and China are seen to be the key contributors to next year’s non-OPEC supply growth. OPEC NGLs and non-conventional liquids are estimated to average 6.03 mb/d in 2015, up from 5.83 mb/d in 2014.”

He waved the brush he was holding in the air as if to brush me off – I’ve often been brushed-off but never literally with a paint brush before – and he said, “Have faith, Amni.”

Just post New Year 2015 I saw him again and he said, “I’ve bought some more.” I widened my eyes in amazement, like a Japanese school girl. He took that as admiration for his bravery, “the price will turn around you know.” At the time, Afren’s shares were trading at 39.3p, when around September 2014 they were hovering around 97p. January 2014, just a year before, Afren traded at 169p.

He grinned, and in his grin I saw a little bit of fear, as if my lack of enthusiasm had shaken his previous carefully constructed conviction.

I thought to myself then, how does this man do his research, if a single doubtful look can cause such doubt and fear? Maybe investing is really an art for some, where every critic’s glance is pain, and every negative comment about the beloved stock deserves a violent put down rather than a calm examination of its validity.

In March 2015, Afren was closing in on a $200m rescue deal that perhaps could have helped it stay afloat. It was also dealing at the time, with various whistle-blower reports. The following month, a dispute arose and this was the statement issued by Afren,

Afren plc (“Afren” or the “Company”) (LSE: AFR) notes the press reports regarding the purported termination by AMNI Petroleum Development Company (“AMNI”) of the Production Sharing and Technical Services Agreement between AMNI, the Company and Afren Energy Resources Limited in respect of the Okoro field (the “PSTSA”).  As announced on 13 March 2015, Afren has previously received a notice of breach of the PSTSA from AMNI, which it rejected.  Afren vigorously disputes that AMNI is entitled to terminate the PSTSA for the alleged breaches.  Afren has offered to meet AMNI to discuss the parties’ future collaboration under the PSTSA and operations continue at Okoro in line with the Company’s expectations.

The Company continues to make good progress on satisfying the relevant conditions precedent to the provision of the interim funding announced on 13 March 2015 and expects to finalise arrangements for completion of such funding imminently.  

On 29th May 2015, this was Afren’s interim report:

Q1 2015 net production at 36,035 bopd, above FY guidance range but in line with expectations; Q1 2015 Revenue of US$130 million; Operating cash flow before movements in working capital of US$59 million; Capex US$212 million; Net Debt US$1,196 million.

“In line with expectations” is a phrase you get familiar with very quickly if you are one of the first to open company reports at 7 in the morning every day *nods to S*. But, whose expectations? And is it expectations provided we face unchanged environment, or as the economists like to say, ceteris paribus, all other things equal?

In the following July 2015, Afren finally unrolled the white flag,

As announced on 15 July 2015, the recently completed operational review has led the Company to expect materially lower near-term production from its assets as compared to the production level assumed in the restructuring plan announced on 19 June 2015. This change is due to a number of timing and pricing assumptions, as well as to some delays in project implementation during the period when initial funding was being finalised. Whilst the overall capacity of the assets to deliver field life production remains broadly unchanged, the near-term deferral of production revenues has undermined the immediate liquidity position of the business. The Company has subsequently engaged in detailed discussions with all its stakeholders, including lending banks, bondholders and partners, to discuss the impact of the revised assumptions on Afren Plc’s near-term cashflow, funding requirements and the resulting amendments in the terms of the restructuring which are required to deliver the revised business plan.

The board believes that all the possible routes have now been explored during the course of this process, which was subject to a strict timetable, driven by Afren Plc’s short-term liquidity issues. These discussions have failed to deliver support for a revised refinancing and restructuring proposal that would result in Afren Plc being able to pay its debts as they fall due. As a result, the Board has taken steps to put Afren Plc into administration and appoint Simon Appell, Daniel Imison and Catherine Williamson of AlixPartners as administrators. The relevant documentation will be filed at Court during the course of the day.

Nothing against expressing a conviction and I myself have seen several trades go wrong – in fact, as investors, we have all seen it happen. A very risky bet in a well-diversified portfolio can be a good idea, but not if it is one of only a handful of names that represent a good part of your wealth.

Sometimes I see him passing by on the road and he would slow down his car, give a quick press on the horn and a wave to say hi. The last time we bumped into each other he said, “I’ve bought XYZ, just a little bit, you know how it is with investing…”

I nodded my head in agreement even though I wished I had the guts to say, “D, that’s not investing, that’s gambling. At best, a pretty weak speculation.”



One thought on “Investing: The Things We Tell Ourselves

  1. aFren was an interesting one with some fairly smart people saying hold until about 3 pence.
    I was lucky enough to keep well away (short or long). Some people never learn – my lesson was PDX – that won’t happen to me again.

    Nice post – thanks 😊

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s