Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

INSTEAD of a RM402.6 million expansion plan it announced eight months ago in February, Sumatec Resources Bhd is now proposing to buy outright an oilfield concession that it is operating for RM1.55 billion.

When asked about the change of plan, Sumatec managing director Abu Talib Abdul Rahman cites funding as a hurdle for the February proposals, which, he adds, did not adequately address several key issues the company was facing.

These include “legacy shipping debt, the Section 218 (of the Companies Act 2016) winding-up petition, cash flow and operational constraints”, Abu Talib tells The Edge. The latest plan is better as it allows Sumatec to move forward with a “clean slate”, he adds.

The shipping debt refers to money owed and guarantees undertaken for its former shipping subsidiary — Semua International Sdn Bhd group of companies — amounting to about US$40 million.

The winding-up petition was served on Sumatec’s former subsidiary, Semua Chemical Shipping Sdn Bhd, on July 28 by NFC Labuan Shipleasing Ltd. The latter claimed various payments totalling US$13 million under two bareboat charter agreements between 2008 and 2014.

The petition blocked a previous proposal to acquire the oilfield concession in August last year, says Abu Talib. “The petition has since been withdrawn (and) we can proceed with the current exercise.”

To recap, on Oct 26, Sumatec announced the proposed acquisition of Markmore Energy (Labuan) Ltd (MELL) for US$370 million (RM1.55 billion) alongside several corporate exercises, including a balance sheet reconstruction, equity fundraising and debt settlement.

MELL is the ultimate owner of the Rakushechnoye oil and gas field in Kazakhstan, which Sumatec is developing following a 2012 joint-investment agreement (JIA) inked with the former.

In turn, MELL is wholly owned by Markmore Sdn Bhd, which is 99.99% owned by businessman Tan Sri Halim Saad. The remaining one share in Markmore is owned by Abu Talib. Halim is also Sumatec’s largest shareholder with a 16.79% stake.

The acquisition of MELL will involve US$290 million (RM1.22 billion) in cash payment plus the issuance of 1.68 billion new Sumatec shares worth US$80 million (RM366 million) at 20 sen apiece to Halim.

When asked why the proposed transaction involved such a big cash payment from Sumatec, Halim tells The Edge that a bigger share portion of the consideration risks raising his stake to above 33%, which would trigger a mandatory general offer.

Apart from signing a heads of agreement with Halim’s vehicle Markmore Sdn Bhd to acquire 100% of MELL, Sumatec also plans to reconstruct its balance sheet by setting off its RM226.1 million in accumulated losses via a capital reduction and consolidation of every four existing shares into one.

Thereafter, it seeks to raise at least RM1.52 billion via a rights issue to fund the cash portion of the proposed MELL acquisition as well as further development of the Rakushechnoye field.

In its Oct 26 filing, Sumatec says it also intends to settle all major debts, including those related to the Semua group of companies.

Sumatec had controlled the Semua group of companies, which was a shipping entity, before selling a 49% stake in it to Singapore-listed Hoe Leong Corp Ltd in 2010 for about RM44.1 million. This was several years before Halim emerged as a substantial shareholder in late 2013.

Sumatec is currently engaged in multiple litigation proceedings with Hoe Leong Corp in Malaysian and Singaporean courts, according to its latest quarterly financial report.

 

Massive rights issue

Despite taking a different tack, the proposed MELL acquisition, like the February proposals, entails a massive rights issue that presents a tough choice for other Sumatec shareholders — fork out more money or face potentially significant dilution.

On the flip side, Sumatec’s earnings may rise significantly once the acquisition is completed as onshore oil and gas production is significantly cheaper than offshore production — there is a wider buffer against global oil price fluctuations.

According to Halim, Sumatec’s production cost per barrel is about US$10 at present. Last week, Brent crude futures broke past US$60 per barrel for the first time in two years. On Oct 11, the US Energy Information Administration said it expects Brent crude to average US$52 per barrel in 2017 and US$54 per barrel in 2018.

“We are confident that our low production cost (being onshore) and familiarity with the field (having operated in Kazakhstan since 2013) will make us resilient to price pressures,” says Abu Talib.

The RM1.52 billion rights issue will offer entitled shareholders the right to subscribe for 15 new shares for every two shares held after the four-to-one share consolidation. To sweeten the deal, subscribing shareholders will get six free warrants and two free shares for every 15 rights shares subscribed for.

A full subscription may see up to 7.61 billion rights shares issued. In contrast, Sumatec’s share base stood at 4.06 billion prior to the proposed four-to-one consolidation.

To recap, in February, Sumatec outlined proposals to raise up to RM80 million via the private placement of up to a billion shares to new investors.

It also proposed a renounceable rights issue with warrants — of up to 3.22 billion shares — that aimed to raise between RM193.3 million and RM322.6 million together with a proposed issuance of 800 million shares to pay contractors in the oilfield.

These were to be followed by a second phase worth US$298 million that included the construction of a gas-processing plant. The scale of the exercises dwarfed Sumatec’s market capitalisation at the time of just above RM300 million.

In its financial year ended Dec 31, 2016 (FY2016), Sumatec suffered a net loss of RM62 million on revenue of RM46.4 million. It was still loss-making in the first half of FY2017, recording a revenue of RM8.23 million and net loss of RM3.05 million due to a 73.2% year-on-year drop in turnover.

Last Thursday, Sumatec closed at six sen for a market capitalisation of RM223.22 million.

 

‘Better deal’

Abu Talib says the latest proposal is a “better deal” as the company will now take full ownership of the proven plus probable oil reserves (2P) amounting to 139.4 million barrels of oil equivalent (boe) in the Rakushechnoye field.

Based on the 2012 JIA, Sumatec is entitled to only 50% of the profits from the oil production after taking full profit for the first two million barrels of oil produced. Since mid-2017, MELL has been funding the operations at the oilfield on Sumatec’s behalf given the limitations imposed by the NFC Labuan winding-up petition, says Halim.

In June, MELL’s 25-year concession of the oilfield, which expires in August 2025, was extended by another 25 years, according to a Bursa Malaysia filing.

Having a tangible asset widens Sumatec’s funding options down the road, says the managing director. In addition, it expects further upside from the acquisition as the 2P reserves only amount to 10% of the concession area based on a 2014 assessment.

“Sumatec needs tangible assets for it to satisfy the creditors and bankers. Without collateral and direct control over cash flow, Sumatec will always be undervalued and fundraising will be difficult,” says Abu Talib.

 

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