To Cliq or not to Cliq? (8)

A new development in this case, according to this announcement:


..... Best Oracle has filed a Judicial Review Application to the High Court of Malaya (“the High Court”) (“the JR Application”) in respect of the request/decision by the Securities Commission (“SC”) via a letter from Maybank Investment Bank Berhad (“Maybank IB”) on 7 January 2016 to CLIQ Energy Berhad (“CLIQ/the Company”) (“the Said Letter”).


In the JR Application, the SC was named as the first respondent and CLIQ was named as the second respondent. Best Oracle is a 20% shareholder of the Company and the shareholders of Best Oracle are the 5 members of the Management Team of CLIQ.


Best Oracle has the most to lose when the company will be liquidated, they put in the initial money. It will be interesting to follow the above JR Application, with CLIQ being the first SPAC being liquidated, we are in unchartered waters.

I have written a lot about SPACs in the past, here is a 2013 article from Investor Central about the IPO of CLIQ.

To Cliq or not to Cliq? (7)

As expected, Cliq Energy Bhd. will close shop.

A report by The Edge:


CLIQ Energy Bhd, the second oil and gas special purpose acquisition company (SPAC) listed on Bursa Malaysia, will be liquidated and returning monies to shareholders after the Securities Commission (SC) declined its request for more time to acquire its qualifying asset (QA).

"The company will soon be resolving the process towards its liquidation and returning monies in the trust account to the entitled shareholders, according to the applicable laws and rules," CLIQ added.


Money, time and effort wasted, pity.

Both in preparing the company towards its IPO and in running the company since the IPO trying to find a QA.

For the warrant holders I assume nothing remains.

The "winners" (in relative terms) are the people who picked up the Cliq shares below the liquidation price, they will receive a decent yield.

Enthusiasm for future IPOs of SPACs will diminish. I can't shed a tear for that.

To Cliq or not to Cliq? (6)

The company announced:


The Board wishes to announce that the Company had on 30 January 2016 received a letter from Maybank IB (“Letter”) serving notice to the Board of its resignation as Principal Adviser to the Company for the Proposed Acquisition and Proposed Rights Issue with Warrants with effect from 6 February 2016, being seven (7) days from the date of the Letter pursuant to the terms of its appointment letter.


Ouch ...... that is a very clear red flag, another one.

Is it time for the Board of Directors to call off the proposed acquisition? I definitely think so.

To Cliq or not to Cliq? (5)

I have been rather sceptical about Cliq's qualifying proposal.

The company announced on Bursa the following (some snippets, emphasis mine):


.... the SC had vide its letter dated 29 January 2016 addressed to Maybank IB, returned the Application as the SC is unable to proceed with its review due to required information and documents that have yet to be submitted to the SC relating to several fundamental matters in relation to the Application that have yet to be addressed, in particular:

(i)         Supporting data used in the assessment of the volume of oil reserves by the independent technical expert that has yet to be provided to the SC. Without this, the SC is unable to determine if disclosures to shareholders of CLIQ are appropriate;

(ii)         An independent expert was appointed to provide a fairness opinion as required under item 4, Part F of Appendix 10B of the Main Market Listing Requirements issued by Bursa Securities (“Fairness Opinion”). However, the independent expert has relied on the asset valuation report prepared by the asset valuation expert, despite not taking a view on the reasonableness of the report and its contents, in arriving at its fairness opinion. This qualification has been specifically stated in its Fairness Opinion. As a result, shareholders of CLIQ would not have the benefit of a fairness opinion that encompasses all aspects that they need to consider to make an informed decision; and

(iii)        The technical reports prepared by the independent technical expert and the Fairness Opinion have not been updated to reflect the current oil prices trends. This is not in compliance with paragraph 3.34 of the SC’s Guidelines on Due Diligence Conduct for Corporate Proposals.

The Company has taken all reasonable efforts to address the above required information and documents in relation to the Application. However, the Company had also encountered certain unanticipated external factors beyond its control namely:

(i)         substantial drop in oil price since the signing of the SPA on 24 March 2015; and

(ii)         substantial depreciation of RM against USD which resulted in the shortfall of cash available to satisfy the purchase consideration for the Proposed Acquisition.

In addition, the Company was unable to obtain certain information from third parties to support the assessment of the volume of oil reserves and consequently, the relevant updated reports which were all required for the Application.

The Board will deliberate on the next course of action to be taken and an announcement will be made by the Company in due course.


I would like to add that the economy of Kazakhstan and its currency also have been hit severely by the sharp decline of commodities. I am pretty sure that therefore the sellers would like the deal to continue (all foreign money is probably welcome at the moment).

But is this deal at the agreed price, given the current situation in the oil and gas industry, in the best interest of the shareholders of Cliq? Time will tell.

Cliq: messy annual report

Cliq announced on August 3rd its annual report, on August 5th its amended annual report and on August 7th another amendment on the same report. The last amendment consists of seventeen pages, quite shocking.

I do understand that Cliq's Board of Directors is getting all excited about its possible acquisition, but it really should put more care in writing its annual report.

Kinibiz wrote a good article, clarifying the different motives for management and shareholders of a Spac:

"Misaligned management and shareholder goals: Spacs".

Some snippets:


For the management teams of Spacs, it is about getting a qualifying asset or acquisition at all costs, so the company can graduate to become a full-fledged company like any other on the bourse. Shareholders, on the other hand, want to get a nice return on their investments and this might come even if the Spac does not graduate.

Cliq has identified and signed a sales and purchase agreement to acquire a 51% stake in two producing Kazakhstan oil blocks for US$117 million (RM429.53 million as at the announcement date) from a local Kazakh company, Phystech Firm LLP. It is currently in the process of gaining regulatory approvals before being able to take it to its shareholders. Sona, meanwhile, has said that its management team is in advanced discussions over several assets and is confident they will meet their deadline.They had better be confident, because the alternative is losing their entire investment.

It comes down to this: the management team’s primary focus is to secure a deal so long as it allows them to graduate, while shareholders will be torn between the promise of eventual gains post-QA (possibly quite far in the future) versus a tidy risk-free gain at the end of three years.

Management and shareholders, two different agendas – only in the curious world of Spacs.

To Cliq or not to Cliq? (4)

Cliq Energy announced the result of the fairness opinion by the independent valuation expert, Deloitte.

First of all, "good old" DCF is used. As usual, a long list of assumptions, some of which are very important:

Secondly, the result of the valuation is presented:

While the outcome of a DCF calculation can hugely change according to which parameters one uses, the final range of 113M to 124M falls "exactly" around the purchase consideration of 117M. Too much of a coincidence?

As usual, no details of the DCF are given, so we can't check anything of the actual calculation.

As often described in this blog, I don't like DCF valuations based on a huge amount of assumptions, some of which (for instance the amount of reserves, the price of oil, political/regional conditions, etc.) would alter the result by a huge margin.

Just to detail one aspect, how can one calculate the uncertainty of investing in a country like Kazakhstan? I honestly have no idea how to incorporate country or regional risk in an objective way in a DCF calculation.

On a more positive note, a comparison with similar deals is presented, something that makes much more sense to me:

The average price per boe (barrel of oil equivalent) of the three deals is USD 6.41, while Cliq only pays USD 5.82, that looks good.

But the most recent deal done is by Sumatec Resources (relevant since the price of oil and market conditions were similar to Cliq's) was done at a price of only USD 4.21 per boe. The question is why does Cliq pay 38% more per boe than Sumatec?

Unfortunately, there are no other details regarding the three deals, and how they compare to the proposed deal of Cliq (for instance the existence of assets or liabilities other than the oil reserves in the target companies).

The evaluation of Deloitte is that the deal is "fair and reasonable", which is no surprise because it was more or less announced before by the CEO:

"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".

To Cliq or not to Cliq? (3)

Focus Malaysia (FM) wrote an article "Oil price slump not all sweet for SPACs".

FM revealed that Hong Kong listed Willie International Holdings Ltd (273) has tried to acquire the same assets in Kazakhstan about six years ago. Two relevant announcements can be found here and here.

Unfortunately no reason was given why Willie terminated the deal, other than that the deposit was returned, which often means that the potential buyer (Willie) was not at fault.

[On a side note, Willie International is mentioned by David Webb as being in the "Chung Nam" network, not a complement by any means.]

The above episode does indicate that for a long time already the owners of Phystech are on the lookout for a buyer. There might be some cause for concern there, why was no one interested and why do they so "desperately" want to sell their assets if they are so profitable?

A rather interesting comment is made by Ziyad, MD/CEO of Cliq:


"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".


That is a bold statement, so even if the price of oil falls to US$ 21 per barrel, the deal will go through as the acquisition price will be within the fair market value range? I think at the moment there is a lot of stress already in the oil & gas industry, I can't even imagine what would happen when the price falls significantly further. Players that are (highly) leveraged or have high extraction costs will face severe problems or even bankruptcy.

On another matter, the article in FM continues:


"A local analyst tells FocusM the success of the SPACs' listing is due mainly to the good governance, rules and regulations by the Securities Commission (SC)."


While I do admit that the SC has done a good job in safeguarding investors interests, that doesn't mean to me that SPACs suddenly make sense, from a business point of view.

Also, the analyst mentions "success", I wonder which "success" the analyst is pointing at. There is no SPAC yet that has produced any operational profit whatsoever (although I admit it is still early days), while all of them have incurred expenses so far.

The fact that several SPACs have been able to list is not a measure of success, at least to me.

Weekly roundup

Regarding Cliq: The Edge wrote an article "Potential adjustment to price of Cliq’s QA". Some snippets and comments:


Ahmad Ziyad said that if a disparity between the oil price and the purchase price still exits in March, the assets’ price tag may be adjusted by 5% of the current amount, or no less than US$218.5 million.


Five percent adjustment is not that much, the impact of the lower oil price on the price should be much higher, in my opinion.


When asked why Phystech was willing to sell its assets, Ahmad Ziyad said: “They think that all this while they have not realised the full potential of the field.”


That is not what I hoped to read, better something like: "there is enormous potential, but the company has not enough funds to explore, so Cliq will purchase new shares in the new SPV with which new exploration wells will be drilled, old machinery will be replaced by new, efficient ones".


I have been very critical of SPACs from the start, I am afraid I have not yet seen any reason to change my mind in this matter.


MSWG wrote in their newsletter of March 27, 2015:

That is indeed good news. However, I like to note that Amin is a large shareholder of Integrax. For small shareholder (in the absence of large shareholders fighting to get a better deal) there should also be enough venues to participate in shareholders activism. In some countries I have noted class action suits, taken up by an organisation similar to MSWG, with large amounts of minority investors chipping in. That scenario still appears far away in the Malaysian context.


Kinibiz wrote: "At SP Setia, a conflicted ex-chief judge", a snippet:


Can the chairman of a public-listed company rightly hold shares in another public-listed company — a direct rival at that?

Common sense says no. In fact the law also says this should not be. But this scenario is exactly what has unfolded with regards to SP Setia chairman Zaki Azmi.

Zaki, a former chief justice, holds 19.12 million shares in Eco World Development Group as of Jan 22, according to the latter’s latest annual report. On that date this corresponded to 3.77% of Eco World’s outstanding shares base, making him the third largest shareholder, and was worth RM37.2 million at Friday’s closing price of RM1.95 per share.

And it was not just Zaki. Eco World’s latest annual report also reveals that SP Setia’s two foremost management executive — acting CEO Khor Chap Jen and acting COO Wong Tuck Wai — holding 2.29 million and 1.53 million shares respectively as of Jan 22 this year. The shareholdings come to 0.45% and 0.3% respectively of the outstanding shares base at that point.

This raises pressing questions of conflict. Foremost is why Zaki and company are apparently turning their backs on the obligation for company directors to actively avoid positions of conflicting interests under Section 132 of the Companies Act, which stipulates that directors must use “reasonable diligence” in the discharge of his duties.

Worse, this rubs salt onto SP Setia’s festering wounds after a massive talent drain to Eco World, which is now counting a legion of former SP Setia men — all the way up to the top — as among its directors, top executives and most of its workforce.


It is indeed rather strange and worrisome, the investments in Eco World of the persons mentioned above are substantial. Will that have an impact in their acting in the best interest of SP Setia?

To Cliq or not to Cliq? (2)

Regarding my previous posting about this matter, it seems I wasn't the only person who had questions regarding Cliq's announcement.

Bursa queried the company with 8 highly relevant questions, which Cliq answered, some in a convincing way, some less so.


5. Justification in using the URALS oil prices forecast in the economic modelling, given that the price of oil has dropped substantially in the recent months

The oil price estimates included in the economic modelling was based on URALS oil price and the typical spread of Brent oil price to URALS oil price is about USD2 per barrel. In the middle of  January 2015, there has been a reduction in Brent oil price to around USD47 per barrel and the Brent oil price has since recovered to around USD56 to USD59 per barrel in March 2015.

As a result from the current low global oil prices, AGR believes that the demand for energy resources from the industries will increase, and hence, in the opinion of AGR, this is expected to further spur oil prices for the next 5 to 6 years. In addition, political instability in the Middle East may also result in a reduction in global oil supply and this is expected to further support the recovery of global oil prices.


The price of Brent Oil over the last six months:

It shows quite a difference, the current price (USD 56.41) is about 20% lower than the one used in the first announcement (USD 70.90). Since there are fixed expenses the gross margin must therefore be much lower.

AGR believes that the oil price will rise in the next 5 to 6 years. That might happen, but still, the base price is 20% lower, which should have quite a large impact on the near future projections, and thus the DCF valuation.


7. The financial information as required under Paragraph 19(d)(ii) and (iii) of Part A and Paragraph 1 of Part H, Appendix 10A of the Main Market Listing Requirements of Bursa Securities 

The financial information set out in Section 3 of the Announcement is for information purpose only and may not reflect the future financial performance of the SPV as the BTA entails the transfer of the Vendor’s assets (excluding liabilities, payables, cash and receivables) including Subsoil Use Contract, contractual obligations and certain existing employees to the SPV. As such, the SPV does not assume any prior liabilities arising from the Proposed Acquisition. In addition, the SPV has yet to be incorporated as at to date.

The disclosure of financial information of Karazhanbas Northern Field based on the financial statements of Phystech pursuant to Paragraph 19(d)(ii) and (iii) of Part A and Paragraph 1 of Part H, Appendix 10A of the Main Market Listing Requirements of Bursa Securities (i.e. profit before tax, profit after tax and minority interest, shareholders’ funds and total borrowings) may not be applicable in view that the Company is only acquiring the asset of Phystech.


That might be strictly speaking correct, but is still disappointing. The assets are generating financial numbers in the Profit & Loss and are valued in the Balance Sheet, and one would thus be interested in the full picture, not in some "selected financial information".

For instance:

• How much tax is the company currently paying?
• What is the current depreciation?
• At what value are the assets in the books?
• For how much money have they been acquired, and when?
• What is the current paid-up capital of the company?
• How much cash does it have?

Some of these will help in evaluating the assets to be acquired in the SPV, others are meant to form an opinion about the company that CLIQ will work together with (for instance its ability to keep its side of the bargain).

As mentioned before, a proper snapshot (past and current, balance sheet, profit & loss, description) of a company should not take more than a single page.


8. Financial information of Karazhanbas Northern Field based on the latest unaudited accounts for 2014

The financial information of Karazhanbas Northern Field based on the latest unaudited financial statements of Phystech for the FYE 31 December 2014 is not available at this juncture as the management of Phystech is in the midst of finalising the same.


That is disappointing, negotiations started in December 2014, that should give the company ample time to have the books ready by now.

Please note that The Edge wrote that "In 2013, Phystech recognised earnings before interest, taxation, depreciation and amortisation (Ebitda) of US$22.61 million.".

That is incorrect, it is unfortunately only RM 22.61 million.

To Cliq or not to Cliq?

Cliq Energy has finally announced its qualifying acquisition, an investment in an oil and gas company based in Kazakhstan.

Regular readers know I am not "exactly" a fan of DCF valuations. Unfortunately, it has been used in this case:

The price of oil that is used in the DCF model is the prevailing price in December 2014.

However, the price of oil has since drastically fallen:

I certainly hope that a new DCF will be calculated, based on the recent price of oil. It will give a much lower outcome, is my estimate. Hopefully the details of the DCF will be published, although I doubt that.

Cliq had a long time to come up with its proposal, so we can expect lots of financial numbers.

Unfortunately, it is very disappointing:

Some comments:

• Not a single balance sheet number of Phystech;
• Some profit & loss numbers, however no PBT or PAT but the dreaded EBITDA (whenever they are presented, the earnings are much lower than the EBITDA number, we have to wait and see if that is also the case here);
• EBITDA for 2013 only RM 23 Million, does not really look exciting;
• Numbers are only up to December 2013 (15 months old), even tiny ACE-listed companies have already announced their (unaudited) December 2014 numbers a month ago, why can't Phystech give their unaudited numbers?

I have seen excellent formats provided by research houses where lots and lots of relevant data regarding a company is packed in one single page. Although the announcement of Cliq counts 26 full pages, relevant numbers are very scarce, lots of important (financial) information is left out.

We must hope that the official brochure to Cliq's shareholders will be of a much higher quality.