"Hibiscus - the story of a succesful SPAC"?

Article in The Star, one snippet:


"Hibiscus should not only be applauded for being the first SPAC, but also a successful one."


I have been rather sceptical in the past about SPACs in general and Hibuscus was no exception.

Below is the share graph since inception, it shows a rather wildly fluctuating price, from initial RM 0.59 to RM 2.68 crashing down to RM 0.16 and up to its current price of RM 0.98. A rather bumpy ride for a stock that was perceived to be rather speculative.

If we dive into the latest quarterly financials then we notice the following:

In other words, despite being listed for almost seven years and having received more than seven hundred million of shareholders capital, the company still has not shown a profit overall. That does not seem to be impressive, simply putting the money in a Fixed Deposit would have yielded something like RM 200 Million in interest payments.

One should also take note that three quarters of its assets consists of intangible assets. An investor should deep dive in the nature of these intangible assets to check if any of them should be revalued.

So is Hibiscus indeed a successful SPAC, as The Star wants us to believe? Looking at the results delivered so far the answer has to be negative.

When will Hibiscus bloom? (4)

There has been confusion regarding the size of a stake in subsidiaries of Hibiscus Petroleum. The company was queried by Bursa and gave some answers.

It looks like a rather murky affair, with lots of legal angles, many of them in jurisdictions outside Malaysia, very difficult to evaluate. These kind of legal battles tend to be costly and can take a long time to resolve.

Kinibiz wrote an interesting article about the affair, some snippets:


This leaves Lime Petroleum Plc – in which Hibiscus Petroleum has 35% – with just 3.51% compared to 73.82% previously.

According to a report by Singapore Business Times, LPN cut its share capital from 382 million Norwegian krone to 80.32 million krone by accounting for 30.9 million krone of uncovered losses and transferring 270.8 million krone to other equity. Then 900,000 LPN shares held by Rex were cancelled and Rex then reinvested the 77.4 million krone it received into LPN for new shares.

On Dec 14, 2015, Singapore Stock Exchange-listed Rex International Holdings Limited, which owns Rex Middle East, announced that it now controls 98.77% of LPN – up from 73.82% –following a restructuring of the company’s capital.

....

In other words, surely Hibiscus Petroleum had knowledge of the exercise proceeding as a shareholder. What went wrong?

Among others, shareholders tracking Hibiscus Petroleum’s filings to Bursa Malaysia would not know much detail of what sort of restructuring took place at LPN. There is also scant information on how much was disclosed to Hibiscus Petroleum prior to the restructuring taking place and how accurate the company thinks this information may have been.

A number of questions rise for the average minority shareholder in Hibiscus Petroleum as well as the market at large, given the relative scarcity of information as to what really happened leading to this remarkable dilution in one company.


Hibiscus is raising money through a private placement (as it had done many times before), which will give some much needed support to its balance sheet. But at a share price much lower than most other shareholders paid for their shares, giving rise to large dilution.

From the moment that SPACs were announced by the authorities a few years ago, I have been very skeptical about them. I don't see yet any reason to change that stance.

When will Hibiscus bloom? (3)

From the previous posting about this subject:

".... the Company believes that there may be some shareholders who have been subject to margin calls on shares that have been collateralised and are being asked to regularise their margin positions."

It looks like at least one party has been revealed who was selling in the market due to margin calls, according to this announcement:


MERCURY PACIFIC MARINE PTE LTD

No of securities disposed 45,923,900

Circumstances by reason of which Securities Holder has interest Disposal on open market due to margin call forced selling

Hibiscus' shares were suspended yesterday, for the fifth time this year:

3D Oil (Hibiscus invested in the company and partially funds the exploration of the Sea Lion project) had a rather bad announcement today:

Its share price plunged 33% today:

When will Hibiscus bloom? (2)

I wrote before about this subject, and in general about Hibiscus in a rather sceptical way.

I don't know if Hibiscus will ever bloom again, and if so when, but definitely not today.

Hibiscus' share price dropped steeply, way below its IPO price:

In an answer to an "UMA" (Unusual Market Activity) query by Bursa, the company replied:

".... the Company believes that there may be some shareholders who have been subject to margin calls on shares that have been collateralised and are being asked to regularise their margin positions."

Added to that, the short term outlook for Oil & Gas does not look good, the RM has depreciated against the USD and the company has never made an operational profit in its existence.

When will Hibiscus bloom?

Interesting interview on BFM Malaysia with Dr Kenneth Pereira, Managing Director of Hibiscus Petroleum Berhad, one of the SPACs listed on Bursa.

Its share price performance so far:

Hibiscus has booked losses throughout its history (except for one year where paper profits were booked under "other profits" due to some revaluation).

That is disappointing, given the fact that the company is listed for four years already, but also given the large amount of hype surrounding its 3D Oil partnership, as for instance described here:


... has demonstrated that its Rex Virtual Drilling Technology significantly increases the chances of success in drilling for oil and gas.

Hibiscus said that tests of the technology conducted over a period of several months by Oslo stock exchange listed North Energy.

It showed that Rex Virtual Drilling technology repeatedly and accurately predicted the presence or absence of oil without physically drilling a well.

Rex Virtual Drilling is a software-based tool which relies on the phenomenon of resonance in seismic data to detect hydrocarbon deposits and predict oil quality as well as in-place volumes.

The Rex technology package is available to Hibiscus’ jointly-controlled entity, Lime Petroleum Plc, which has exclusive use of the Rex Technology package for all concessions in the Middle East and in Norway on a project basis.

The licensing agreement which gives Lime exclusive use of the technology in 15 Middle East countries is for a period of 5 years from 24 October 2011, with automatic annual renewal thereafter.

In some eight ‘blind’ tests conducted on previously drilled wells in the Norwegian Continental Shelf by North Energy, the technology was successful in all cases in predicting whether each well was dry, had traces of oil or if it had substantial oil reserves.

Hibiscus had also done its own blind tests with successful outcomes.

While average success rate for exploration drilling is estimated to be around 15%, or one successful discovery for every seven wells drilled, the Rex Virtual Drilling tool could change the dynamics of successful exploration drilling.


I have been very sceptical about SPACs from day one and see no reason yet to change that stance.

Opportunities in 3 SPACs?

Regular readers of this blog will know that I am not exactly a fan of SPACs, especially in the Malaysian context (previous postings here, here and here).

To me it just doesn't make sense to list an empty company, it is already difficult enough for investors to make sense of companies that IPO with a real track record (as a rule of thumb, I insist that companies are listed for at least two years to become "investable", at least to me).

I saw the interest in especially energy SPACs as a sign of a market that has become much too speculative.

The Star published today an article on its website: "HLIB: Opportunities for investors to lock in long-term returns in three SPACs". Some snippets:


The three listed special-purpose acquisition companies (SPACs) that have yet to make their qualifying acquisition (QA) are trading below their “intrinsic cash values” and hence offer a unique opportunity to investors, according to Hong Leong Investment Bank Research.

“Reach Energy Bhd, Sona Petroleum Bhd and CLIQ Energy Bhd are currently trading at a 13% to 16% discount to their respective intrinsic cash values,” said analyst Jason Tan in a note.

He added that the current discount provides a “unique opportunity” to lock in long-term returns.


First of all, the word "unique" sounds overdone for me. There are many companies trading at a discount to its NAV, sometimes even to its cash holding, in other cases having assets that can be disposed of in a short period.

Secondly, the fact that these companies have not yet made an acquisition is most likely a blessing in disguise, with the price of oil having fallen so much lately.


In a worst-case scenario, investors holding to maturity could get an attractive return of 17% to 29%, he said.


Worst case scenario? Surely the analyst must be joking. I can imagine many worse scenario's, for instance the company making an acquisition that doesn't work out, or an investor having to sell their shares with the share being lower then now. The worst case of each share of a listed company is simply that its price goes to zero, SPACs are no exception to that.


.... when Hibiscus announced its QA, the discount was zerorised and thereafter the stock began trading at a premium towards the completion of the deal.

“This underpins our belief that the intrinsic cash value serves as a base return with an upside option from a value accretive QA,” Tan said.


Few comments:

• Building a theory based on one single case (Hibiscus) is a tricky thing to do
• Hibiscus share price did indeed take off after the acquisition, but it has also sharply decreased in price lately, from above RM 2 to currently below RM 1 (although still higher than its IPO price)
• Hibiscus is still showing an operational loss, the only profit it has shown was a "paper" profit based on a revaluation exercise

I continue to be highly sceptical of SPACs, despite certain quarters continuing to write about success stories in other countries (which I strongly doubt). Trading in shares and warrants of SPACs on Bursa appears to me highly speculative.

A new SPAC will be introduced, Asian Healthcare Group led by former banker Yvonne Chia. It will be interesting to follow how that company will fare.

No XMas present for Hibiscus shareholders

Hibiscus Petroleum announced yesterday its findings regarding the first oil well:

• Mud losses in two carbonate sections of the well prevented Masirah Oil Limited from reaching its planned target depth.
• Data analysis indicated presence of non-commercial hydrocarbons.

In other words: bad news for Hibiscus shareholders.

I have written in the past in cautious terms about SPACs and Hibiscus, I think many investors who rushed to buy its shares went over their head in expectations. The oil & gas industry is a hit and miss industry, with much more "misses" than "hits". Fortunes have been made, but also been lost, many well known entrepreneurs have tried it and failed.

The above drilling result does not mean the end for Hibiscus, but it does put things in perspective. Expectations were high, very high, probably too high, also partly fuelled by the company itself:

"The prospect MNN #1, which is about 1,000 metres in depth, was selected for drilling after in-depth technical evaluation and verification using the proprietary Rex Virtual Drilling technology, in addition to confirmations provided via conventional methodologies."

And before the company wrote this about their Rex technology:

• "significantly increases the chances of success in drilling for oil and gas"
• "repeatedly and accurately predicted the presence or absence of oil without physically drilling a well"
• "in eight 'blind' tests .... the technology was successful in all cases". 

"MalaysiaFinance" wrote about the possibility of insider trading, which does indeed look worrisome, hopefully the authorities will investigate in depth.


I would like to draw the attention of the readers to the rather peculiar timing of the events, announcing the results during the holidays, when most likely authorities and fund managers etc. are on holiday.

We saw the same happening to Protasco's Puzzling Purchase which was announced during the Christmas break. It is one of the strangest corporate proposals in Malaysia in the last ten years that somehow or the other was done just before the year end. Despite expectations raised by the company that the deal would be wrapped up in a short time, now, one whole year later, minority shareholders are still left in the dark.

Returning to Hibiscus, the company has booked operational losses so far in its history, which in itself is not such a surprise, given its short existence and the long lead time to earn real revenue.

It was able to book a paper profit due to the following corporate exercise:


Hibiscus Petroleum Bhd said a corporate investor, Palladium Fund Management Inc has acquired a 15% stake in its joint venture company Hirex Petroleum Sdn Bhd via a US$10 million (RM31.5 million) investment.
 
"The subscription is expected to provide Hirex with sufficient working capital to fund its other operational costs for the next two years,'' it said in a filing with Bursa Malaysia yesterday.
 
Palladium's entry is expected to result in an increase in the proforma earnings of Hibiscus for the financial year ending March 31, 2014 by RM12.6 million, or 4.2 sen a share.
 
"The increase earnings is mainly derived from the one-off gain arising from the dilution in Hibiscus' equity interest in Hirex from 48.24% to 41%,'' Hibiscus said.

The strange thing is that searches on "Triax Ventures Corp" and "Palladium Fund Management" do not reveal any information at all about these companies. Which is rather speculiar for a company engaged in fund management in the age of the internet.

SPAC's: Boon or Bane?

Initial Public Offers (IPO's) for Special Purpose Acquisition Companies (SPAC) seem to be the flavour of the month on Bursa Malaysia. The following companies are either listed, or will be listed soon:

• Hibiscus
• CLIQ Energy
• TerraGali Resources
• Australaysia Resources & Minerals
• Sona Petroleum

The share price of Hibiscus has performed well since its listing, probably explaining the recent surge in SPAC's. Hibiscus booked a loss of 7m over 2012. It made some acquisitions, apparently shareholders believe that these will pay off in the future. At the moment, it is much too early to say anything about this, these things take time.

Some general remarks about SPACs:

• The companies have no track record, assets, turnover or brand names
• The managers receive large chunks of shares (about 20% of the issued capital) for a very cheap price, almost for nothing
• They still receive millions a year in management fees
• Listing fees are high, often around RM 20 million (depending how much money is raised), to be paid from money raised
• Shareholders often receive warrants, that sounds interesting, but is neutral when all parties receive warrants; on top of that, sometimes the insiders have warrants with a lower exercise price
• Shares offered often are at about 25% premium to NAV, meaning the net asset value has to rise by 33% just to equal the IPO price
• Often difficult financial structures are used, for instance Hibiscus issued RCPS and CRPS, "alphabet soup" instruments designed by financial engineers that will be much too difficult to analyse for the huge majority of the retail investors
• I also noticed already a Private Placement for Hibiscus, another concern

The IPO documents are still very thick, around 250 pages, and that for companies with no history.

In my opinion:

• SPAC's are very good for the managers, they have almost nothing to lose and still earn good wages
• The verb is "you can't have your cake and eat it", but SPAC's managers prove the verb is wrong
• Minority shareholders pay for the dilution by and fees for the managers, and carry almost all of the risk

Much more preferable (in my opinion) for investors who are interested in these industry (energy and other natural resources) to simply invest:

• In a basket of listed global mining or energy blue chips, companies with proven track records; some examples are BHP, Barrick Gold, Royal Dutch Shell, Total, Statoil, etc.
• Or (if an investor has no time to analyse them) in well managed funds who invest in these areas (Blackrock for instance has some decent energy, gold and mining funds)
• Or (if people deem the management fees of these funds as too expensive) in energy or mining ETF's with very low fees

SPAC's are instruments designed by financial engineers, they don't add any economic value, in my opinion.

While engineering in general has brought us so much good (cheaper, better, stronger solutions), financial engineering hasn't, in the contrary. Unfortunately, financial engineering is getting more and more popular on Bursa Malaysia.