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This article first appeared in The Edge Malaysia Weekly, on December 21 - 27, 2015.    

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THE euphoria around the big leap in the prices of oil and gas special purpose acquisition companies (O&G SPACs) is but a memory for those still holding onto their investments. Investors who had the foresight to take profit when share prices skyrocketed and crude oil prices were above US$100 have been proven right.

Some believe that the long wait for the delivery of earnings from Hibiscus Petroleum Bhd, a former SPAC, highlights the investment risks of this breed of companies.

Furthermore, the oil boom’s bust has sparked debate on whether the Securities Commission Malaysia should have introduced SPACs in the first place. It was a move to woo more initial public offerings (IPOs) on Bursa Malaysia, which has experienced a declining number of new listings in recent years.

The O&G SPACs could be a cheaper entry for investors who want to invest in upstream O&G assets. But the risks associated with them seem to be higher than many Malaysian investors, who are pretty new to the exploration and production segment of the O&G industry, expected.

The sluggish crude oil price environment should augur well for the three O&G SPACs currently listed on Bursa— CLIQ Energy Bhd, Sona Petroleum Bhd and Reach Energy Bhd. They should be the beneficiaries of the dive in crude prices that is     forcing distressed companies to hive off attractive assets for cheap.

Unfortunately, the sharp depreciation of the ringgit has eroded the war chests of these blank cheque companies. This means that their purchasing power for qualifying assets (QA) is much weaker now with the same amount of cash in hand.

Their ringgit-denominated cash piles have shrunk significantly, given that the local currency has slumped over 23% against the US dollar year to date. The depreciation of the ringgit began in August 2014, when the exchange rate for the US dollar was 3.15. Today, US$1 is worth over RM4.30.

Worse still, time is not on the side of CLIQ and Sona. The two SPACs were listed in April and July of 2013 respectively, meaning that both need to secure a QA by the first half of 2016. Under the listing requirements, SPACs have three years to buy their first QA.

Reach Energy, which was listed in August 2014, has more breathing space as it still has another two years or so to complete its QA.

Of the three O&G SPACs, CLIQ (fundamental: 1.35; valuation: 0) has declined the most in value in terms of US dollars.

Its IPO raised RM364 million or US$120 million in 2013, but as at last Wednesday, the value of its proceeds had shrunk 29% to US$85 million.

CLIQ has proposed a cash call to make up for a funding shortfall in order to make its QA. The rights issue is expected to raise a minimum of RM210 million to help fund the QA and future expansion plans.

CLIQ announced its proposed QA in March this year to buy a 51% stake in Phystech II Joint Stock Company, which has onshore oilfields in Kazakhstan, for US$117.3 million.

The purchase consideration was revised downwards just over a week ago to US$110 million. The revision is less than many had expected considering the meltdown of oil prices.

Just three months after CLIQ’s IPO, Sona raised RM550 million, which was equivalent to US$171 million at that time. Since then, its war chest has shrunk 25% to US$128 million.

In early November it proposed to wholly acquire Stag Oilfield, off Western Australia, for US$50 million, or RM215.5 million.

This is just over 40% of the amount Sona has in its trust account. The remainder is pegged for infill development.

Reach Energy raised RM750 million or US$238 million from its IPO in late 2014, of which 94.75% was put in a trust account for the QA. To date, the value of its IPO proceeds has contracted 27% to US$174 million. As at its latest financial statement at end-July, Reach Energy had RM735.3 million in its trust account.

SPACs are required to retain at least 90% of their IPO proceeds in a trust account to fund the QA. In the event the SPAC is unsuccessful, the money in the trust account is returned to shareholders.

Reach Energy has shortlisted four candidates in Asia-Pacific for its QA, and is targeting to secure it in four months.

Hibiscus (fundamental: 0.75; valuation: 0.90), too, is feeling the pinch of a tight cash position in the present operating environment.

The company acquired its QA in April 2012 but it has yet to deliver any oil revenue. And its operating cash flow is still in deficit. In September, Hibiscus announced a proposed private placement of 25% of its paid-up capital.

The private placement is expected to raise RM207.9 million. About half has been allocated for its ongoing projects while RM6.3 million will be spent on placement expenses and the remaining RM96.6 million will go towards future developments.

In November, Hibiscus revealed the results of its Sea Lion exploration well — none of the six zones contained commercial hydrocarbons. It will plug and abandon the well and move on to other investments. Hitting a dry well may not be new to Hibiscus shareholders by now.

Some may say it is an unlucky strike for SPACs given the tough scenario they are in now. But, all is not lost. In fact, SPACs are on the buying lists of some fund managers after share prices dipped below the cash per share in the trust account during the year. The investment case is simple, shareholders will be refunded their share of the cash in the trust account if they vote against the proposed QA.

 

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