This article first appeared in The Edge Financial Daily on May 3, 2018

KUALA LUMPUR: Sumatec Resources Bhd plans to seek its shareholders’ approval to restate its accounts based on the International Financial Reporting Standards (IFRS), which will see it avoid a potential impairment of about RM500 million, said Tan Sri Halim Saad.

Halim disclosed this when contacted to comment on external auditor Messrs Grant Thornton Malaysia’s disclaimer of opinion on Sumatec’s audited financial statements for the financial year ended Dec 31, 2017 (FY17), announced on Monday. Following the news, the group’s shares sank 1.5 sen or 23.08% to five sen yesterday.

Halim said the Malaysian Financial Reporting Standards (MFRS) applied by the auditor — which he noted does not have specific guidelines for the oil and gas (O&G) industry — requires the group’s RM298.95 million investment in the Rakushechnoye O&G field in Kazakhstan to be impaired because production has been slow and the sum invested is insufficient.

Also required to be impaired is a current trade receivable sum of RM195.79 million from its proposed acquisition target Markmore Energy (Labuan Ltd) (MELL). This potential impairment amounting to RM500 million, is one of the reasons the auditor expressed its disclaimer of opinion, said Halim.

The auditor, he said, has taken that position on the view that there are risks of non-recovery. However, Halim said such risks are low as it is an onshore field where production cost is around US$8 (RM31.44) per barrel, versus about US$30 per barrel for an offshore field.

He also said the investment’s recoverable value from future development and production, or the value of reserves in the Rakushechnoye, is higher than the invested amount. A previous filing with Bursa Malaysia by Sumatec stated the group only requires around 1,500 barrels per day for seven years to recover its total investment in the Rakushechnoye O&G field.

The group has also accepted an offer from a prominent China contractor to increase production to an additional 3,500 barrels per day by January 2019, and to as much as 5,000 barrels per day in 2020 on the contractor’s own funding.

Halim, also Sumatec executive vice-chairman, said it is not necessary to impair under IFRS 6 — which deals with the exploration for, and evaluation of, mineral resources — as there is proven oil reserves in the Rakuschechnoye oil field of around 139 million barrels of oil equivalent (boe). There is also no stop-work order or any call for default raised, and its exploration rights in the oil field are still active and unlikely to expire in the near future, he added.

“So, under the IFRS 6, we did not fail the impairment test. In IFRS, there is a ‘working interest’ [under which] we could categorise assets in the oil field instead of [relegating them to] ‘intangible assets’.”

This, he said, means the percentage of ownership in the oil field and the rights to explore, drill and produce oil will be amortised based on the unit of production method using total proved and probable oil reserves estimated to be recoverable.

“If we follow the IFRS, allowing for working interest, the group’s financial position will be in a much better position. We have the share on the oil that will be produced,” Halim told The Edge Financial Daily on the phone.

He also opines that the IFRS method will be more suitable for the group since its oil reserves are in Kazakhstan where the IFRS is applicable to oil companies there. “If we want to take up borrowings or loans in the international market, we will need to follow the IFRS to have consistency.”

No basis for going concern issues, says Halim

Halim also rubbishes the auditor’s assessment that there are going concern issues at the group. “How can there be going concern issues when there’s no winding up notice being served to Sumatec?” he said.

He said in addition to his 12.7% stake in Sumatec, he has advanced US$25 million to Sumatec, to pay for Sumatec’s share of operation costs in Kazakhstan — as he is optimistic that the turnaround story for the company will materialise in FY18.

In arriving to its disclaimer of opinion, the auditor, in Sumatec’s Bursa filing on Monday, said it was unable to obtain sufficient audit evidence in assessing the practicalities of the assumptions made by the management in terms of the viability and sustainability of the oil field’s development plans and the necessary expenditures needed.

As such, it could not ascertain whether Sumatec’s proposed plans will be implemented successfully and as such, could not determine the effects on profits and positive cash flows which may be generated.

It was also uncertain, among others, of the recoverability of the group’s total non-current and non-trade receivables of RM135.7 million and the company’s non-current trade receivables of RM23.5 million from its business partner CaspiOilGas LLP, as well as the RM195.79 million from MELL.

In addition, it said the company is exposed to material financial obligations in relation to the guarantees provided amounting to RM173.09 million and had also defaulted in payment of a loan amounting to RM22.53 million. These factors, combined, may cast a significant doubt on the group’s ability and the company to continue as a going concern, the auditor added.