Protasco's Puzzling Purchase (2)

I wrote before about Protasco's proposed deal to buy into an Indonesian oil & gas company, a rather strange deal since Protasco has no relevant industry experience in this field.

The company just announced that it has entered in an amended Sales and Purchase Agreement, 13 months after the initial announcement. Was the first announcement made during the Christmas holiday, this time it was made on the evening of the CNY family reunion diner. Interesting timing indeed.

The deal in short (all PT companies are Indonesian based):

• Anglo Slavic Petrogas, a BVI based company, owns 100% of PT ASU
• PT ASU owns 100% of PT ASI
• PT ASI owns 95% of PT FAS, an oil & gas exploration company
• PT FAS owns 70% of PT Haseba
• PT Haseba has the rights to KST Field

Protasco wants to buy a big chunk of PT ASI shares from PT ASU.

The old deal (28 December 2012): Protasco buys 76% of PT ASI for USD 55M, with a USD 55M profit guarantee (spread out over 4 years). This deal values PT ASI at USD 72M.

The new deal (29 January 2014): Protasco buys 63% of PT ASI for USD 22M, with a USD 22M profit guarantee (spread out over 4 years). The deal values PT ASI at USD 35M.

It seems that the value of PT ASI suddenly has halved while the profit guarantee is down a whopping 60%! No reason is given for the much lower profit guarantee, puzzling.

PT ASI's net assets are only USD 9M. The valuation (about 4 times net assets) is done by KPMG based on the DCF (Discounted Cash Flow) model.

I think this tool is completely unsuitable (I wrote before about this) to calculate the valuation for a junior oil & gas company, due to the enormous uncertainties, for instance:

1. The prices of oil and gas, fluctuating a lot
2. Exchange price between different currencies
3. Cost of exploration, often projects are more expensive and take longer than planned
4. The exact amount of reserves available and the economic viability to extract them
5. The possibilities of disasters, either caused by men (oil spills etc.) or by nature (the field is near an earthquake prone area)
6. Possible changes in the conditions of the concession or in the tax rate (happen quite often, especially if profit is good and the government changes)
7. High corruption and low corporate governance standards and enforcement in Indonesia (for instance compared to Malaysia)

There is still no approval to extend the partnership agreement that expires on December 2014 for another 10 years. The extension is however a condition for the deal to go through.

There still is hardly any transparency at all, for instance:

• Who is behind the BVI based seller Anglo Slavic Petrogas?
• What are the expected extraction rates and what are the oil & gas reserves of the KST Field?
• Why was the exploration of KST Field stopped in the past? In 2011 revenue of PT Haseba was zero
• Is there any middlemen, is any commission paid for this deal?
• Who owns the other 30% of PT Haseba?
• What did PT ASI pay to own 95% of PT FAS?
• Protasco will make an advance of another USD 5 Million to be used for exploration, how much are the other companies (PT ASU, the other shareholders of PT Haseba) contributing?

Bad news is that the amount of money to be invested and loaned represents 24% of Protasco's net assets, and since this is less than 25% the company doesn't need shareholders approval nor does it need to appoint an adviser. Is it by chance that the percentage is just below the threshold?

An anonymous person pointed at the possible role that Adrian Ooi Kock Aun plays in the deal, he was appointed to the board of Protasco just before the deal was announced December 2012. He is the CFO of PT Inovisi Infracom Tbk, an Indonesian listed company that also invests in oil & gas. The guarantees that are given out are based on a large block of shares of PT Inovisi Infracom Tbk. Surely Adrian Ooi must be aware of the identity of this large shareholder who is most likely the person/company behind Anglo Slavic Petrogas, the seller. Should this information not be made public?