Thursday, 13 February 2014

Protasco's Puzzling Purchase (3)

I wrote in my previous posting about "Protasco's Puzzling Purchase":

"There still is hardly any transparency at all".

Protasco was simply begging Bursa to be queried, and Bursa "happily" complied, issuing a list of 21 (excellent) questions.

As far as I remember, by far the longest list of questions I have ever seen from Bursa (and I must have read hundreds of them). But may be that was Protasco's intention all the time, to be admitted to the Malaysian Guiness Book of Records.

Protasco did answer all questions, revealing lots of new information.

I will cherry pick some of it (I recommend shareholders of Protasco to read the whole document):

Question 2: why the valuation is so much lower than in the initial S&P agreement

"The purchase consideration of USD55 million under the Original SPA was derived at based on the Vendor’s valuation of the KST Field and taking into consideration Protasco’s effective interests in PT Haseba of 50.5%."

To just take over the vendors valuation sounds rather naïve to me, surely the vendor is interested to get as high a price as possible?

Question 3: Basis and justification for Protasco to enter into the Restated SPA as it is noted that Due Diligence in still on going

"The Board has decided to proceed with the Restated SPA to enable Protasco to take control of PT ASI, so that PT ASI can commence with the exploration, well re-activation and/or construction of the well (if required) in accordance with an agreed development plan approved by Pertamina.  The development plan is an integral part of the PMPA extension and/or other similar agreement by Pertamina to extend the PMPA beyond its expiry on 14th December 2014 for the Extension."

It looks like there is currently not enough money in PT ASI to commence activities, and PERTAMINA needs to see development going on. That is why the deal now is pushed through. Protasco will provide a loan of USD 5 Million for this purpose.

Question 7: To disclose basis and justification (including bases and assumption) in arriving at the valuation of USD35 million

"The valuation of USD33.3 million in KST Field by KPMG, Singapore is arrived at using the income approach [discounted cash flow method (“DCF”)].  In arriving at the valuation, the following bases and assumptions are used:"

And then a long list of assumptions is mentioned, a list that can easily be expanded on. The problem with DCF is that changes in a single assumption can cause quite large changes in the outcome, changes in a few assumptions will render the valuation basically useless. DCF might be useful in calculating the value of a bond, or of a toll highway with predictable traffic, but it is completely unsuitable to calculate the valuation of a junior energy play like PT ASI.

Question 10: Detailed information on KST Field

"(d) PT Haseba is entitled to USD32.39/bbl for every barrel received at sales point when the Indonesia Crude Price (“ICP”) is over USD100/bbl"

As far as I can see, the USD 32.39 is a fixed amount, this would hugely limit the upside potential, shareholders of Protasco should take notice.

Question 14: Information on PT Inovisi Infracom TBK (“PT Inovisi”)

"The substantial shareholder [of PT Inovisi] is PT Green Pine, holding 60.2% equity interest in PT Inovisi. PT Green Pine has business relationship with the Vendor [of PT ASI]"

What does "business relationship" mean? Do they infrequently do some trading or are the major shareholders substantially the same? I guess more towards the latter. Protasco has not been forthcoming at all about information regarding the seller (which is ultimately owned by a BVI registered company).

Question 19: Statement by Protasco

"Protasco, after considering the report by KPMG and barring unforeseen circumstances, is of the opinion that the Profit Guarantee is realistic."

For the sake of the shareholders of Protasco I definitely hope they are right, but I have strong doubts. This year for instance the company would need to make USD 2M, but the year has already started and there will be lots of initial start-up costs involved. PT ATI's track record so far also does not give any indication that the profit guarantee can be met.

If this deal is really that good, why did the seller (most likely based in Indonesia and having deep knowledge of the oil & gas industry) offer it to Protasco (based in Malaysia and with no experience in the oil & gas industry). The seller could simply have placed the PT Inovisi shares with a bank, borrowed money against it, and (re-)started the wells themselves and reap 100% of the profits.

If a deal sounds too good too be true, it often is too good to be true.

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