CLIQ ENERGY BHD has identified a qualifying asset (QA) in Kazakhstan. The special purpose acquisition company intends to buy a 51% stake in two developed oilfield blocks for US$117.3 million (RM434 million).

However, this is unlikely to be pleasant news for CLIQ’s warrant holders. If the shareholders reject the proposed acquisition, it would make the warrants virtually worthless. This is because CLIQ’s warrants cannot be exercised until the QA is acquired.

Only the original initial public offering shares can lay claim to the funds set aside for the acquisition of a QA, in the event CLIQ cannot identify a QA by April 2016. This amount is estimated to be 71 sen per share, with interest and custodian fees taken into account.

The value of CLIQ’s warrants is dependent on whether the QA materialises. Should the acquisition take place and the two oil blocks generate good money, as the management has promised, the derivatives would have a longer lifespan to ride on CLIQ’s earnings potential.

However, the fact that CLIQ’s closing share price of 66.5 sen apiece last Friday was 6.8% lower than the implied cash value of the company casts doubt on whether shareholders will be keen to approve the QA.

If more than 25% of shares not held by management votes against the QA, the acquisition will be scuttled. If less than 25% reject the acquisition, it will go through, although those that reject the deal will still be entitled to their share of the cash.

Managing director and CEO Ziyad Elias says he is confident that shareholders will vote in favour of the acquisition based on the merits of the QA.

As at last Thursday’s close of 16 sen apiece, the warrants, which have an exercise price of 50 sen, are trading at a discount of 0.75% to the mother share.

Theoretically, the warrants should diverge from the mother share’s price movements as the extraordinary general meeting, where the voting of the QA will take place, draws closer.

Looking at the circular to shareholders, the discounted cash flow model used to value the QA is based on several assumptions, including average crude oil prices being at US$70.90 in 2015 and creep upwards to US$88.90 by 2021.

Note that these assumptions were made in December 2014 and may be revised. Since the wells are onshore, the cost per barrel is estimated to be very low, so breaking even won’t be a problem.

However, management will have to convince shareholders that the yield on the QA is enough to justify a share price that is higher than the implied cash value of 71 sen per share at the moment.

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

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