Saturday, 28 September 2013

Sona Petroleum, speculation about a possible acquisition?

I received many interesting comments recently.

Regarding value investing: I hope to come back to this subject with more material, especially comparing similar companies with different debt levels and the effect on certain metrics.

Article in The Star:

"Malaysia's Sona Petroleum eyes 3 oil fields in Indonesia, China"

I received an interesting tip regarding the above in the comments.

[On a side note: please continue to do so, if you don't want the tip to be published, write so and I will of course respect that].

The tip referred to the above article in The Star and the note to clients of UOB-KayHian.

With Moola's blog being (unfortunately) very quiet lately, I give the first part, with my emphasis on all the speculations, which Moola so detests:

"Special-purpose acquisition company (SPAC) Sona Petroleum Bhd is close to making its qualified acquisition (QA), and the target company is Singapore-listed RH Petrogas Ltd, an oil and gas (O&G) company controlled by Sarawak tycoon Tan Sri Tiong Hiew King (inset). Tiong is chairman of RH Petrogas.

A source explained that Sona Petroleum could be both buying a stake in RH Petrogas via a placement of shares, as well as acquiring some of its assets, which are offshore O&G blocks.

While details are scant at the moment, insiders said that Sona Petroleum was looking to take up a 10% placement of shares in RH Petrogas, as the latter was looking to raise US$60mil (RM190mil) for capital expenditure.

Shares of RH Petrogas have been on a steady uptrend since early this month, rising around 30% over the week to close at 64.5 Singapore cents (RM1.65) on Thursday.

Sona Petroleum’s shares and warrants were also heavily traded, with the mother share gaining 2.5 sen to 43.5 sen, while the warrants rose 1.5 sen to close the day at 27.5 sen."

This a reference to a research note by UOB-KayHian:

"In a note to clients, Singapore’s UOB Kay Hian also mentioned this possibility, stating that according to its “channel check,” Sona Petroleum could be “looking at some of the O&G assets in the Singapore Stock Exchange-listed RH Petrogas.”

Channel checks? This is the definition of a "Channel check":

"a channel check is third-party research on a company's business based on collecting information from the distribution channels of the company. It may be conducted in order to value the company, to perform due diligence in various contexts, and the like. Industries where channel checks are more often conducted include retail, technology, commodities, etc."

How to place a "channel check" in the context of a possible acquisition by Sona? I am not sure.

Also, who would know about this kind of in-depth research, and is this not inside information? There is no official announcement by Sona Petroleum yet, so is the above mere speculation? Or did anyone receive inside information before the general public? Food for thought for the regulators (SC and BM)

I don't have the report by UOB-KayHian, but it seems it can be found here at Malaysia-Finance website (except that the pictures don't load).

I am not a fan of SPAC's, as readers of my blog might be aware of.

I would like to draw the readers attention to the following comment on Malaysia-Finance's blog, with which I fully agree:

"Investing in Special Purpose Acquisition Companies involved in the oil industry is like choosing an exploration company whilst being blindfolded. A veteran oilman will attest to how difficult it is to find a truly attractive oil company to acquire when given a limited time frame to do so.

What is available will be leftovers, namely aged fields discarded and on the verge of final decline or highly risky exploration plays.

Don't be deceived by those $/bbl calculations for it will mean nothing when production declines rapidly within a few short years unless costly EOR measures kicks in."

I would not want to call my self an expert in this field, but I have been actively investing in oil and gas companies for 10 years and have followed many listed companies. Reserves (proven, probable or possible) of billions of barrels, it sounds like having enormous potential, but there are many pitfalls:

  • If an oilfield really looks like a bargain, why would the seller sell it?
  • Owning the reserves and exploiting them is not exactly the same
  • Many exploration projects will have cost and time overruns
  • Costs also often escalate in time, especially after several operational years
  • The price of oil and gas is very volatile and hedging against fluctuations could be expensive (airlines always seems to be on the wrong side of the hedging, losing billions in the process)
  • If a field is highly profitable, the government of the country where it is located could either seize it, or increase taxes etc.

The Securities Commission will soon issue new guidelines for SPAC's, according to this article in The Star:

"The Securities Commission (SC) will soon issue new guidance notes relating to the listing of special-purpose acquisition companies (SPACs), a move that is aimed at ensuring new submissions are of a certain high quality, sources said.

There have been some concerns about the quality of submissions. The SC feels that it needs to elaborate on the original spirit of the SPAC guidelines,” said the source.

The new guidance notes should also enable applicants and their advisors to better understand the requirements of the regulator, thus helping avoid the unsavoury result of seeing applications rejected by the authorities, he added.

“The feeling is that the market has drifted away from the original spirit of SPACs,” noted the source.

That sounds good, although my solution would be more simple: just do away with these SPAC's. If people think there is money to be made, let them do it in the old-fashioned way by starting a "normal" company and only list it when it has proven its worth.


  1. Hibiscus, cliq, sona, wonderful SPAC, all in the fantastic oil and gas industry, or are they?

    These are all murder holes! SPAC is the short from of Selling Promises And Craziness. Best deal for investment bankers.

    Think about it!
    1) Would a promising company need to do deal or merge with SPAC, or rather it just go public through a IPO on its own merits?
    2) SPAC no doubt has some seemingly successful business people behind them. Are you sure they too will succeed in this new ventures? Or they were successful because of luck or through other people? I tend to believe more of the later.
    3)Those early birds whose cost is so much lower will unload in droves once listed, leaving those poor retail investors holding the hot potato.
    4) Investment bankers will be laughing to the banks with your money. They pay themselves multiple times:
    a) When they take it public
    b) Consultant to the SPAC on retainer as a potential acquisition is sought.
    c)When an acquisition is found
    d) The one year process when SPAC is seeking shareholders and regulator approvals.

    Fees, fees, fees, an ATM machine for the investment bankers. Guess whose money in the ATM machine?

  2. Sona not acquiring RH... Great call UOB Kay Hian...