Protasco's Puzzling Purchase

The nice thing about blogging is getting high quality comments. I had my fair share, although I can't always follow up on the information due to time restraints.

One (anonymous) poster pointed me at the following announcement, made by Protasco Bhd (PB):

On behalf of the Board of Directors of PB (“Board”), AmInvestment Bank Berhad (“AmInvestment Bank”) is pleased to announce that PB, had on 28 December 2012 entered into a sale and purchase agreement (“SPA”) with PT ASU to acquire 95,000,000 PT ASI Shares (“Sale Shares”), representing 76% equity interest in PT ASI (“Proposed Acquisition”).

The acquisition is huge, RM 170 million, almost half of its shareholders funds (RM 358 million on December 31, 2011).

The value seems to be in exploiting "KST Field" (an oil and gas field) in Indonesia, the corporate structure is as follows:

The announcement is puzzling (to say the least):

• Protasco does not seem to have relevant experience in the notoriously difficult oil and gas industry, why does it want to take so much risk, especially in Indonesia with poor corporate governance?
• PT ASI is only a few months old: "PT ASI was incorporated in Indonesia on 6 September 2012 as a private limited company".
• PT ASI only has one director who hardly owns any shares. No background of this director is given.
• The vendor is 99% owned by Anglo Slavic Petrogas Ltd, a company registered in the British Virgin Islands, no background is given, a search on the internet returns nothing; who is behind this company, what is their track record?
• The company structure of PT ASI owning part of PT FAS owning PT Haseba is rather artificial, why is such a difficult construction chosen?
• Who are the minority shareholders of PT FAS and PT Haseba?
• On the signing of the S&P, Protasco will pay RM 50 million cash, why so much? This is about 30% of the total amount, much higher than normal in comparable deals.
• On November 1, 2012 PT ASI signed a S&P agreement to buy an additional 46% of PT FAS. What was the price paid for that stake? Why does Protasco not wait until this deal is panned out?

"PT Haseba had on 14 December 2004 entered into a 10-year production management partnership agreement (“PMP Agreement”) with PT Pertamina (PERSERO) (“Pertamina”), a state-owned company, wherein PT Haseba has been granted rights by Pertamina to develop and produce oil and gas in the Kuala Simpang Timur Field (“KST Field”) in the Nanggroe Aceh Darussalam Province, Indonesia (“Asset Injection”). The PMP Agreement was then novated by an agreement dated 3 February 2012 by Pertamina to PT Pertamina EP, and was amended by a supplemental agreement dated 22 February 2012 made between PT Pertamina EP and PT Haseba. The Board understands that PT Haseba has been in negotiation with PT Pertamina EP for an extension to the PMP Agreement to operate the KST Field."

In other words, the production agreement will expire in 2014 (next year!) and it is not sure if PT Haseba is able to negotiate a new contract, and if so under what conditions. Why buy into a company with so much uncertainty?

"The KST Field was founded in 1972 and operated by PT Pertamina Doh Nad Sumbangut until 1997. Thereafter, in 2004, Pertamina awarded PT Haseba a 10-year PMP Agreement for KST Field."

Why the gap of seven years? Also, this field seems to be pretty old, often yields are not that great in old fields. Why can't Protasco give some production numbers for KST Field?

"For information, quoted securities (“Blocked Securities”) amounting to approximately the Deposit has been blocked to secure the Deposit. In the event of non-completion, the Blocked Securities may at the option of PB be sold and the proceeds from the sale of the Blocked Securities shall thereafter be  remitted to PB."

Which securities?

The poor quality in writing of in the above paragraph seems typical of the great hurry in which the document is written. Normally I don't make a point of this (my English is also not that good, I am not a native English speaker), but this time it is remarkably poor for this kind of announcement.

"The Vendor further provides and guarantees to PB that the PT ASI Group shall achieve a consolidated profit before taxation amounting to USD50,000,000 (“Total Sum”) for four (4) consecutive financial years and subject to relevant terms in respect thereto. The Profit Guarantee shall be secured by the Vendor depositing all the Consideration Shares with a stakeholder (“Stakeholder”)."

But the "Consideration Shares" only represent about 12% of the total purchase sum. Therefore, a thorough reasoning should be given: where is the profit guarantee based on?

It is definitely not based on the profit from PT Haseba, its results are poor, its revenue in 2011 is even zero:

Why are no preliminary results for 2012 given? At least the half year numbers should be made available? And why are all the financial statements not audited?

What are the results for PT FAS for the last three years?

The following risk factors are mentioned:

• The PT ASI Group is engaged in oil and gas concessions as well as oil and gas development. In this respect, the Proposed Acquisition represents a diversification from the core business activities of PB in road construction, rehabilitation and maintenance, engineering services and consultancy as well as higher education.
• The Proposed Acquisition would thus expose the Company to the political and regulatory risks in Indonesia and the inherent risks associated with the oil and gas industry which include amongst others, fluctuations in demand for and prices of oil and gas, natural disasters and extreme weather conditions as well as shortage of experienced managerial and supervisory personnel. 
• In particular, the PMP Agreement in relation to the KST Field is for a period 10 years from 2004. There can be no assurance that PT Haseba will be able to procure the extension to operate the KST Field.

Protasco is a listed company with a otherwise decent track record and pays a quite good dividend.

Bursa Malaysia has strangely enough not yet asked any queries to Protasco.

I hope the authorities and/or MSWG will urgently look into this matter. And Protasco really should be a lot more transparent regarding this deal.