KUALA LUMPUR: Amid concerns that special acquisition company Cliq Energy Bhd’s purchase price for two assets in Kazakhstan is deemed high given that it was benchmarked against oil prices last December; it is worth noting that it could be adjusted downward by 5% or no less than US$218.5 million (RM803.95 million). 

The 3% decline in its share price last Wednesday, a day after the special acquisition company announced its proposed qualifying acquisition (QA), reflects investors’ concern that the purchase price is deemed high as it is benchmarked against December 2014’s oil price — at about a 40% premium to the current market price. 

Cliq’s managing director and chief executive officer Ahmad Ziyad Elias told The Edge Financial Daily that the benchmark was such because the deal was negotiated during that time frame and the company may be seeing a price review as a fairness report on the purchase will be done soon. 

“The US$70 (Urals crude oil) as stipulated in the announcement on Bursa Malaysia is just a reference as that was the benchmark during the time of the negotiations. If the independent valuer tells us that it is outside the current range, we have the option to renegotiate the price,” said Ahmad Ziyad. 

The company has also appointed Deloitte Corporate Advisory Services Sdn Bhd as the independent valuer for the fairness report on the purchase consideration which will reflect this month’s fair market value. The report is due in a months’ time. 

He also noted that there is a clause in the sale and purchase agreement that Cliq has an additional three months after signing the deal to perform another due diligence on the assets.

Ahmad Ziyad said that if a disparity between the oil price and the purchase price still exits in March, the assets’ price tag may be adjusted by 5% of the current amount, or no less than US$218.5 million.

Note that Urals crude oil is a basis for pricing for the Russian export oil mixture whose value hovers just below Brent crude oil. After falling by 50% in January, Urals rebounded to hover around US$50 per barrel in March.

To recap, Cliq’s (fundamental: 0.60; valuation: 0) QA will see the company acquiring a 51% interest in a special purpose vehicle (SPV) for US$117.3 million (RM433.4 million). The SPV will be injected two producing oilfields from Kazakhstan-based Phystech Firm LLP.

Ahmad Ziyad said that currently the assets are in motion to be transferred to the SPV and will be listed on the Kazakhstan Stock Exchange prior to Cliq’s entry.

“Why list it? It’s for efficient tax planning … not evading but planning,” he quipped.

Cliq’s executive director and chief financial officer Kamarul Baharin Albakri explained that the value of the SPV is deemed to be US$230 million. Cliq’s purchase that is attributable to its 51% controlling interest is US$117.3 million.

“The funds for the acquisition from the trust account amounts to US$90 million and the balance will be through the vendor financing, which is by Phystech that amounts to US$27.3 million.

“Post completion of the QA by Cliq, there is a requirement of US$30 million working capital for the first year. The vendor will be financing US$15.3 million of it from their 49% shareholding. As such, the fund for this whole purchase, including working capital for Cliq, amounts to US$132.6 million,” said Kamarul.

He further explained that Cliq will be undertaking a five-year development plan on the oilfields, which is expected to increase the revenue of the SPV.

“As the asset is a producing asset, subject to oil price, we would expect that the company will be profitable by the first year after the QA,” he added.

As it is a shell company, Cliq did not record any revenue. Instead, it saw a net loss of RM6.63 million for its second quarter ended Sept 30, 2014, from a net loss of RM4.68 million previously.

Ahmad Ziyad said that the first development plan will see an increase in production from 1,400 barrels of oil per day (bpd) to 7,500 bpd. 

Cliq is also looking to add 400 new wells from 90 wells currently.

The oilfields have reserves of 39.5 million barrels of oil. However, only about two million barrels of oil have been produced.

Currently, 80% of the produced oil from the field is sold to Titan Trading GmbH at market value while the remaining 20% is for domestic sale.

Kamarul said that Cliq will review this arrangement after the completion of the transaction.

Noting that the production cost of the onshore fields is US$5, Ahmad Ziyad said that the company will be in a positive cash flow position two years after the deal is completed and will break even at the end of its fourth year.

“This will be a launch pad for Cliq to be a junior exploration and production player and we have a good project in our hand because the project that we selected is very robust as it has a high upside and a low downside.

“This will be a clean transaction, no liabilities. Strong cash flow is expected ... it is within our capabilities and we have a good partner,” said Ahmad Ziyad.

When asked why Phystech was willing to sell its assets, Ahmad Ziyad said: “They think that all this while they have not realised the full potential of the field.”

Phystech posted earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM29.8 million for its third quarter ended September. It may see its full-year 2014 Ebitda increase from 2013’s RM22.6 million after a decline.

In 2012, Phystech saw Ebitda of RM52.9 million from RM39.47 million a year before. Its Ebitda margin has been on a decline from 38.3% in 2011 to 17.5% in 2013. According to Cliq, the decline was due to production inefficiencies, but is expected to improve with the new proposed development plan which will be implemented by the SPV.

Cliq has set end-2015 for the transaction to be completed. 

Cliq shares dropped two sen to 66 sen after its QA announcement was made last Tuesday. It has since inched up to close at 67 sen last Friday with a market capitalisation of RM419.6 million.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on March 30, 2015.