Thursday 28 Mar 2024
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TWO weeks ago, Hibiscus Petroleum Bhd announced that its 35%-owned associate Lime Petroleum PLC had hit a dry well in Norway.

Hibiscus managing director Kenneth Pereira, however, brushes aside the negative implications and tells The Edge that it is not a major concern for the company.

“The public only picks up on the bad news about the dry well … not many highlighted that we will be drilling more wells in a nearby prospect called Rolvsnes and there is proven oil reserve [there],” says Pereira, who is one of the promoters of Hibiscus.

The company says in an announcement to Bursa Malaysia that there are some 100 million barrels of recoverable oil in the Rolvsnes prospect.

Nevertheless, the announcement of the dry well sent Hibiscus’ share price plummeting to a multi-year low of 71 sen on March 19. The stock has declined 73.5% from its peak of RM2.68 in December 2013. The slump in oil prices has been a dampener as well.

While Pereira acknowledges that none of Hibiscus’ assets have started production or begun to generate earnings, he is quick to point out that the company is awaiting approval to purchase a 25% stake in Kitan oilfield, off the shores of Timor Leste.

“Once we get the approval, we will benefit from oil production there of about 10,000 barrels per day.”

But he concedes that the May 31 deadline for the approval is drawing near. “If we don’t get the greenlight by May 31 … we will have to drop the investment.”

Over at CLIQ Energy Bhd, its announcement of a proposal to acquire a 51% stake in two oil blocks for US$117.3 million (RM433.4 million) in Kazakhstan did not generate much upward momentum for its share price. The stock is hovering in a tight range at between 65 sen and 68 sen.

Interestingly, CLIQ’s share price of 66 sen is still below its cash per share of 71 sen, which will be returned to shareholders if the company fails to find a qualifying acquisition (QA) by April next year.

In contrast, Hibiscus’ share price jumped when it announced its QA back in October 2011, when crude oil prices were above US$90 per barrel. The company’s share price more than doubled while its warrant price tripled after the news of its proposal to buy 35% equity interest in Lime Petroleum for US$55 million. This was before Hibiscus obtained Securities Commission Malaysia’s approval.

In February 2012, after the SC granted its approval, prices of both the share and warrant surged further, although the oil assets Hibiscus were acquiring would not generate any earnings instantly.

Back to CLIQ, the proposed acquisition could be the QA for it to graduate from being a special purpose acquisition company (SPAC).

“The lukewarm response from the investing public is mainly due to the current weak oil prices … the oil and gas sector is not back in favour yet,” says a fund manager.

Unlike Hibiscus, CLIQ is buying oilfields that are already in production. This means that it will instantly receive oil revenue from Kazakhstan.

In 2013, Phystech Firm LLP — CLIQ’s target — recognised earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$22.61 million (RM83.6 million). CLIQ managing director and CEO Ahmad Ziyad Elias believes the company will record the same quantum of Ebitda.

Ziyad told a press conference that CLIQ will ramp up production from 1,400 barrels a day to 7,500 in five years. He reveals that the production cost at the two oil blocks is estimated at US$5 per barrel. Based on that, the oil assets are commercially viable at low crude oil prices.

According to him, 80% of the oil produced is currently being sold to a German company called Titan Trading at market value. The rest is for local consumption.

Ziyad is confident that CLIQ will garner enough votes for the proposed QA.

If more than 25% of the shares not held by CLIQ’s management vote against the acquisition of the QA, the purchase will be called off. If less than 25% reject the acquisition, the proposal will go through, but shareholders who reject the deal are entitled to their share of the cash in trust. However, it is worth noting that CLIQ’s warrants will be worthless if the deal is scuttled (see Page 48).

Under the proposal, the company will buy a 51% stake in a special purpose vehicle (SPV) after the latter floats its shares on the Kazakhstan Stock Exchange. Prior to that, Phystech would transfer two oil blocks to the SPV.

Of late, there has been increased buying interest in the three SPACs that are seeking QA. The buying interest is not due to the perception of bright prospects for these companies but because their share prices are trading below the amount of cash held at their respective trusts.

More importantly, shareholders who don’t like the proposed QA are entitled to vote against the proposal and take back their share of the cash, which seems to be a safe bet.

The investing risk in any SPAC comes about only when the companies have obtained their QA.

Whether a well is dry or produces high sulphur content oil, shareholders have no choice but to stomach the risks as they have voted for the QA.

As Pereira puts it, it is a high risk, high return investment. “For Hibiscus, investors are investing in oil assets, not earnings growth. You need to have a long investment horizon.”

 

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.

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