Notes to the condensed consolidated financial statements

Three months ended 31 March 2015

1. Basis of accounting and presentation of financial information

The condensed Group interim financial statements, comprised of Afren plc (''Afren'') and its subsidiaries (together, ''the Group''), have been prepared in accordance with the same accounting policies, presentation and methods of computation as applied in the audited financial statements for the year ended 31 December 2014, with the exception of taxes, which have been calculated using the estimated full year effective tax rate. The Group policies are in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. Certain information and note disclosures normally included in annual financial statements prepared in accordance with IFRS, as adopted by the EU, have been omitted or condensed as is normal practice for interim reporting periods. The condensed Group interim financial statements are unaudited, and do not constitute statutory accounts as defined in sections 435(1) and (2) of the Companies Act 2006. Statutory accounts for the year ended 31 December 2014 are published on the Group's website, www.afren.com. The report of the auditor on those accounts was unqualified, however it included an emphasis of matter regarding a material uncertainty in respect of going concern. The report of the auditor did not contain any statement under sections 498(2) or (3) of the Companies Act 2006.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operations review of the Annual Report for the year ended 31 December 2014, which is available at www.afren.com. The financial position of the Group at the period end, its cash flows, liquidity position and net debt are described in the Financial review.

Events following the dismissal of the Group's former CEO and COO have placed significant pressure on the Group's liquidity position, resulting in the Group having net current liabilities of US$1,068 million as at 31 March 2015.

The Company's inability to execute the planned refinancing in the middle of 2014, followed by the sharp decline in market oil prices, led the Directors to initiate an urgent review of the Group's capital structure, liquidity and funding requirements as announced on 20 January 2015. On 30 January 2015, the Group announced it had obtained from the lenders of the US$300 million Ebok debt facility a deferral of the US$50 million amortisation payment due on 31 January 2015. On 4 March 2015, the Group announced that the Board had decided at the expiration of a 30 day grace period not to pay US$15 million of interest which was due on 1 February 2015 under its 2016 Senior Notes.

On 13 March 2015, the Group announced a preliminary agreement for the receipt of Interim Funding and the Recapitalisation of the business. The agreement entered into by Afren together with certain noteholders under its 2016 Notes, 2019 Notes and 2020 Notes (Noteholders) and a majority of the lenders under the Group's existing US$300 million Ebok credit facility, wasintended to result in the provision of US$255-US$305 million of net total funding before the end of July 2015. On 30 April 2015, the Company entered into definitive agreements with certain Noteholders and issued US$212 million of private placement notes (PPN), providing US$200 million in net cash to the Group. In conjunction with such agreement, the lenders under the Group's existing US$300 million Ebok credit facility agreed to the deferral of the US$50 million amortisation payments due on 31 January 2015 and 30 April 2015 until the completion of the implementation of the Recapitalisation (at which point it is expected that the amortisation payments will be further deferred until after the repayment of the New High Yield Notes - see below).

In connection with the Recapitalisation, on 30 April 2015 the Group also entered into a conditional agreement to raise US$55 million in additional net proceeds (after the repayment of the PPN) from the issuance of new High Yield Notes due in 2017 (New HY Notes). On 29 May 2015 the Group announced that the Noteholders have agreed to subscribe for further New HY Notes up to the maximum level permitted of US$369 million increasing the additional net cash proceeds by a further $93 million. In addition, as part of the Recapitalisation (i) 25% of the 2016 Notes, 2019 Notes and 2020 Notes (Existing Notes) will be converted to new equity in the Company; (ii) the remaining 75% of the Existing Notes will be extended to mature as to US$350 million in each of December 2019 and December 2020; (iii) the existing Ebok credit facility will be extended to 2019; (iv) new shares will be issued to subscribers to the New HY Notes and the PPN; and (v) the Company will undertake an equity offering of up to US$75 million to shareholders. The Group has also reached agreement with the lender of its Okwok/OML 113 facility to restructure and defer this facility until 2018. 

The US$200 million net cash proceeds from the issuance of the PPN has been deposited in escrow, to be drawn down by the Group over the coming months. Withdrawals from escrow are required to be applied broadly in accordance with agreed financial forecasts, and are subject to an agreed drawdown schedule and the Group's continuing compliance with certain default conditions. The PPN would be repayable by April 2016 if not refinanced through the Recapitalisation.

In order for the Recapitalisation to be implemented there are other conditions that need to be fulfilled, including obtaining (i) the approval of requisite majorities of holders of the Existing Notes in connection with a scheme of arrangement of such Existing Notes; (ii) approval from the relevant courts in the UK and the US as to such scheme of arrangement; and (iii) agreement from the Group's remaining lenders. The Company will also seek the approval of shareholders in general meeting to the terms of the Recapitalisation, which is required in order to issue the new ordinary shares in connection with the Recapitalisation. If shareholder approval is not received, the Recapitalisation will still proceed, but on amended terms for the New HY Notes (see below).

As at 29 May 2015 Afren is in default under the terms of its 2016 Notes due to the non-payment of interest. The Company has received assurances from the ad hoc committee of Noteholders (which members hold in aggregate approximately 63% of the principal face amount of the 2016 Notes and approximately 50% of the total principal face amount of the Existing Notes) (Ad Hoc Committee) that the Ad Hoc Committee has no current intention to take enforcement action with respect to the 2016 Notes held by its members as a result of the failure to make payment of interest due under the 2016 Notes, on the basis that agreement has been reached with the Company and its key stakeholders on the terms of a consensual (but conditional) restructuring.

As at 29 May 2015 Afren is in default under the terms of its 2019 Notes due to the non-payment of interest. The Company has received assurances from the Ad Hoc Committee (which members hold in aggregate approximately 35% of the principal face amount of the 2019 Notes) that it has no current intention to take enforcement action with respect to the 2019 Notes held by its members as a result of the failure to make payment of interest due under the 2019 Notes.

There is a risk that one or more of these Recapitalisation steps outlined above, may not be completed or satisfied and the Recapitalisation may not occur. If additional funds are not available to be drawn under the New HY Notes, and the Recapitalisation does not proceed, the Directors are of the opinion that the Group would become insolvent, absent an alternative proposal being received by the Company that is capable of being implemented.

If shareholder approval of the Recapitalisation is not received, the Ad Hoc Committee and the lenders under the Group's existing US$300 million Ebok credit facility have agreed to an alternative restructuring plan, whereby the economic terms of the New HY Notes will be amended, and the amendment and restatement of the Existing Notes will be revised (so that no new shares are issued). In addition, the New HY Notes will include a requirement for the Company to initiate a sale of the Group's business by the end of 2016, which together will mean that existing shareholders would be unlikely to see any return of their current investment.

On the basis that the Recapitalisation is successfully achieved as outlined above, the Group's financial footing and ability to continue in operation would be significantly strengthened. The Group's financial forecasts and projections for the next twelve months indicate that the Group would then be able to meet its obligations as they fall due, however, this assessment is sensitive to a number of downside risks such as any further significant deterioration in the outlook for oil prices, any significant disruption to the Group's production revenue stream due to operational or other factors, and the crystallisation of other risks such as those described in notes 10 and 13 to the financial statements for the year ended 31 December 2014 (which are available at www.afren.com), particularly if such downside risks were to materialise in combination. Therefore, the Group expects that it will still need to seek industry partnerships, strategic divestments and other fundraising transactions as necessary to build resilience against, or respond to, downside risks, capture the opportunity in the Group's portfolio and secure the Group's future.

The Directors recognise that the combination of the circumstances described above represents a material uncertainty that may cast significant doubt as to the Group's ability to continue as a going concern and that it may be unable to realise its assets in the normal course of business. Nevertheless, the Directors expect that the Recapitalisation will obtain all of the necessary approvals and consents as set out above and the Directors therefore have a reasonable expectation that the Group will be able to successfully navigate the present uncertainties and continue in operation. Accordingly the condensed interim financial statements have been prepared on a going concern basis and no break up adjustments have been made.