30/7/2013 – Sona Petroleum Berhad's stock fell almost 20% on its debut on Bursa Malaysia yesterday.
The stock listed at 42 sen, made a low of 39.5 sen, and closed the first day's trade at 41 cents, compared to the IPO price of 50 sen.
Sona Petroleum Berhad is only the third Special Purpose Acquisition Company (SPAC) to list on the Malaysian stock market, and, like its predecessors, is selling a dream.
Hibiscus Petroleum Bhd listed in 2011, and CLIQ Energy Bhd listed in April this year as shell companies with no business operations.
They promise to acquire a business within three years of listing.
Sona Petroleum Bhd promises to acquire oil-producing assets before July 30, 2016.
This brings up the usual question of how the value of the shares was arrived at when the company currently has no substantial business operations.
But a closer reading of the prospectus reveals that Sona Petroleum Bhd is just the publicly-listed part of a network of private companies.
The management and shareholders are involved with separate, private entities that service oil and gas companies.
These could end up being the suppliers or service providers to Sona.
While we are not making any allegations of wrong-doing, there is a clear risk that contracts are awarded to these private companies above market rates.
The listed entity – and, by extension, minority shareholders – would be at risk of paying more than it should need to.
The prospectus acknowledges these conflicts of interest.
Investors will want to know more details about how these will be managed in practise.
Another curiosity about this company is that the 20% shareholder of the company is, in turn, owned by the management.
But the bottom line for investors is:
1. Will it rise like Hibiscus Petroleum or fall like CLIQ Energy?
It is noteworthy that all three companies, launched since the Malaysian Securities Commission introduced the SPAC concept in 2009, are from the oil and gas sector.
While Hibiscus Petroleum Bhd was quick to purchase operating assets within a couple of months of listing in July 2011, CLIQ Energy Bhd has not yet acquired any operating business since listing in April this year.
That is probably why the stock price of Hibiscus Petroleum has trebled, whereas CLIQ Energy's stock is hovering near the IPO price.
Therefore, can Sona Petroleum repeat the success of Hibiscus Petroleum? Or will it languish like CLIQ Energy?
And how long will it take?
2. What is the need for Special Purpose Acquisition Companies?
In today's world, you don't need cash in your pocket or in your bank account to spend money, thanks to credit facilities.
Similarly, a company won't miss out on a deal only because it doesn't have enough cash to pay for it.
If it's compelling, banks will want to lend to it. The only question is the cost of those funds.
In this regard, SPACs are like Private Equity (PE) funds.
These high-risk, high-reward funds actually invest in teams of experienced people, in the knowledge (hope?) that a strong team can pull together a strong business.
Then, why should investors hand over their hard-earned money without knowing what they are going to buy, and at what price?
SPACs could at least identify asset(s) they aspire to buy, before they comes out with an IPO.
Even PE funds would expect that.
Arguably, investors get lured by manifold returns after the listing of a SPAC (case in point: Hibiscus Petroleum) which justifies one of the founding principles of stock markets – the higher the risk, the higher the return.
The promoters of SPACs believe investors' confidence is the driving force behind the rising stock prices.
But a recent report in The Star Online hinted at another theory that there is some 'share price support exercise' going on among a group of shareholders of the two listed SPACs – Hibiscus and CLIQ - using the profits churned out from the sale of the warrants.
Just like its two listed peers, Sona Petroleum Bhd is also issuing one detachable warrant for every share in the company.
3. Why is it that all the SPACs have issued detachable warrants in the IPOs?
Moving on, Sona Petroleum Bhd's IPO has been fully subscribed and the company raised RM550 mln in gross proceeds.
According to another report in The Star Online, the public portion of the IPO was oversubscribed 5.97 times.
4. When will Sona Petroleum's cornerstone investors sell?
Sona Petroleum Bhd sold 275 mln shares (about a 20% stake) in the IPO to six cornerstone investors.
But Sona Petroleum didn't impose a lock-in period, which would prevent the cornerstone investors from selling their shares during, say, the first six months of listing.
In an email reply to the Business Times, Dato' Sri Hadian Hashim – the managing director of Sona Petroleum – said the lock-in period on the cornerstone investors was not needed because the structure of a SPAC ensures the confidence of the long-term investments.
He said the IPO price – for which the cornerstone investors bought shares - is not reflective of the full value of Sona until so-called "Qualifying Assets" (QA) had been bought.
"As such, we believe they are unlikely to be short-term investors as they would want to reap the full benefits from the QA", he added.
But the question remains: if the cornerstone investors are here for the long-term, why were they not in favour of a lock-in period?
Sona Petroleum Bhd was incorporated on May 23, 2011 under the name of Titanium Windfall Sdn Bhd.
Headquartered in Kuala Lumpur, the company assumed its present name when it became a public company on February 25 this year.
It had issued about 28.57 mln new shares at 35 sen per share to 'initial investors' on February 20.
The 'initial investors' were also allotted one detachable warrant with every new share (Note 3 on page 99).
5. Who are the 'initial investors'?
We couldn't find the details of the 'initial investors' who were allotted shares in the company immediately before the IPO.
Just before the IPO, Platinum Autumn Sdn Bhd owned a 74.2% stake in Sona Petroleum while the remaining stake was owned by the 'initial investors'.
Platinum Autumn Sdn Bhd is an investment company owned by the management of Sona Petroleum.
In the IPO, Sona Petroleum Bhd issued 1.1 bln new shares, with an equal number of detachable warrants, at 50 sen per share.
After the IPO, Platinum Autumn owns a 20% stake in Sona Petroleum comprising of about 282.14 mln shares issued at just 1 sen per share (page 156).
Platinum Autumn also owns about 282.14 mln warrants convertible into an equal number of shares. (page 158).
Each warrant issued to Platinum Autumn, 'initial investors' and the IPO investors is valid for five years and is convertible into one share of Sona Petroleum at 35 sen per share (page 20).
6. Why should an IPO investor pay 50 sen for a share when the management got it for just 1 sen?
In any other company, the promoters bear the risk and create value in the company before taking it to the public in the IPO.
But in the case of Sona Petroleum, there isn't a business and the management, who also happen to be the promoters, haven't created any value in the company before the IPO.
Therefore any reasonable investor would wonder why he/she should pay 50 sen for a share while the management bought it for a single sen just a few months ago.
Not just that, the 'initial investors' bought shares at 35 sen per share which is still lower than the IPO offer price of 50 sen per share.
7. On what basis was the IPO offer price arrived at?
At the time of the IPO, the management of the company and all other investors are on the same footing.
In fact, the management is in a minority with a 20% stake after the IPO.
Then on what basis was the IPO offer price increased from 1 sen, which the management paid, to 35 sen, which the 'initial investors paid, to 50 sen?
Speaking of the proposed business, Sona Petroleum Bhd intends to acquire assets in exploration and production (E&P) phases of the oil and gas value chain.
In other words, it intends to exploit oil and gas from under the ground.
Further details can be found on page 94 of the prospectus.
Sona Petroleum Bhd doesn't have an operating business.
The company has disclosed these results for Q1 ended April 30, 2013:
Revenue: RM52,407 vs Nil
Profit: (RM524,973) vs (RM787)
Cash flow from operations: (RM1.86 mln) vs Nil
The only revenue generated was from interest income.
The company is expected to further lose cash in operations unless it acquires any operating business.
Further details can be found on page 271 of the prospectus.
Sona Petroleum Bhd aspires to be an E&P player in the oil and gas industry.
E&P refers to the upstream segment of the oil and gas value chain, starting from the identification and qualification of oil and gas resources to their development and commercial production.
Sona Petroleum's management is upbeat about the E&P business because of the expectation of sustained high prices of oil and gas in the long-term.
Based on the Independent Market Research report, the management expects the crude oil price to hover around US$110-US$120 per barrel in 2013 and 2014, before increasing to US$125 per barrel in 2020.
Sona Petroleum feels a balanced portfolio would comprise of a 30% investment in exploration assets and the remaining 70% investment in production and development assets.
The company aims to acquire exploration assets with prospective reserves of 100 mln barrels to 400 mln barrels.
And it will acquire producing/development assets with 5 mln barrels to 30 mln barrels of proven/contingent reserves.
The management intends to acquire equity interests in E&P companies with existing concession rights to explore, develop, sell and export oil and gas extracted from an acreage for a fixed period of time.
Sona Petroleum would acquire assets where it would have at least joint control over the operations as well as over the strategic and financial decisions of the asset.
The management is interested to acquire assets in Southeast Asia, Middle East and selected countries in Africa, namely Algeria, Angola, Chad, Republic of Congo, Ethiopia, Kenya, Mozambique, Nigeria, United Republic of Tanzania and Uganda.
In an interview with the StarBizWeek, Dato' Sri Hadian bin Hashim, the Managing Director of Sona Petroleum, said their preferred acquisition targets would be fields producing 2,000-5,000 barrels per day.
The company will acquire a producing asset first, which is likely to have a steady cash flow, he added.
With the cash generated, he intends to replenish the company's reserves by acquiring development and exploration assets.
Further details can be found on page 103 of the prospectus.
Sona Petroleum's board consists of eight directors.
Dato' Sri Hadian bin Hashim is the Managing Director of Sona Petroleum.
He is a chemical engineer with more than 30 years of experience in the oil and gas industry.
Dato' Sri Hashim became a shareholder and director of Integrated Petroleum Services Sdn Bhd (IPS) in 1999.
IPS group of companies provide support services to the offshore oil and gas industry in Malaysia, Southeast Asia and Central Asia.
In 2006, he became the executive deputy chairman and CEO of IPS.
In the first quarter of 2013, Dato' Sri Hashim relinquished his executive positions in IPS.
Pages 135 & 189 say he remains a non-executive director and substantial shareholder of IPS group of companies.
Dato' Sri Hashim is a non-executive director and indirect substantial shareholder of the Baker Hughes group of companies in Malaysia.
He is also a non-executive director and indirect shareholder of Sobena Offshore Inc Sdn Bhd.
He is a non-executive director and a 90%-shareholder of Hendroff Holdings Sdn Bhd and Hendroff Mud Engineering Services Sdn Bhd.
All these companies operate in the oil and gas industry.
Still, on page 189, Sona Petroleum says Dato' Sri Hashim involvement in these companies is not expected to give rise to conflicts of interest and direct competition to its proposed business.
8. Will Sona Petroleum hire the services of companies related to Dato' Sri Hashim?
Sona Petroleum will need to hire third-party services once it acquires E&P assets.
Therefore, will it hire the services of companies related to Dato' Sri Hashim?
If yes, how will it tackle the conflicts of interest that would arise?
Dato' Sri Hashim is a director and a 26.90% shareholder of Platinum Autumn Sdn Bhd (page 159).
Dato' Maznah binti Abdul Jalil is the non-independent executive director and CFO of Sona Petroleum.
She held senior position in the Hicom group between 1997 and 2006.
According to a report in The Star, she was a key lieutenant to the late Tan Sri Yahaya Ahmad of DRB-Hicom.
Dato' Maznah assumed an executive role as head of corporate finance and principal investment of Hong Leong Financial Group Bhd in 2007-08.
From 2009 to 2011, she was the executive vice president for corporate finance advisory for Kenanga Investment Bank Bhd.
In June 2011, Dato' Maznah set up Moore Stephens AC Advisory Sdn Bhd, the then corporate advisory arm of Moore Stephens, Malaysia.
Subsequently, the company was renamed as SCS Global Advisory (M) Sdn Bhd.
Dato' Maznah continues to be a shareholder and the non-executive chairman of SCS Global Advisory.
Currently, she also serves as an independent non-executive director of Pavilion REIT and Prestariang Bhd.
Dato' Maznah owns a 16.81% stake in Platinum Autumn which owns a 20% stake in Sona Petroleum (page 159).
Anton Tjahjono is a non-independent non-executive director of Sona Petroleum.
He is a founder and director of two oil and gas companies in Indonesia.
Sona Petroleum doesn't see a conflict in Mr Tjahjono's business interests and those of the company (page 190).
9. Will it hire services of companies related to Anton Tjahjono?
Mr Tjahjono's businesses are related to the infrastructure and construction segment of oil and gas industry.
One wonders if Sona Petroleum will hire the services of these companies after acquiring E&P assets.
If yes, how will it tackle the conflicting interests of Mr Tjahjono?
Mr Tjahjono also owns a 3.36% stake in Platinum Autumn Sdn Bhd (page 159).
Mohamed Sabri bin Mohamed Zain is another non-independent non-executive director of Sona Petroleum.
He has more than 30 years of experience with PETRONAS.
He serves as an executive director and president of an oil and gas service provider, GOM Resources Sdn Bhd – a wholly-owned subsidiary of Puncak Niaga Holdings Bhd.
He also serves as an executive director of KGL Ltd, a company involved in offshore leasing of vessels and a subsidiary of Puncak Niaga Holdings Bhd.
He owns a 10.08% stake in Platinum Autumn Sdn Bhd (page 159).
Dato' Mohamed Khadar bin Merican is an independent director of Sona Petroleum.
He is also an independent director of RHB Bank Bhd, RHB Investment Bank Bhd, RHB Capital Bhd, Astro Malaysia Holdings Bhd and Air Asia Bhd.
Datuk Seri Panglima Sulong bin Matjeraie is another independent director of Sona Petroleum.
He served as a Court of Appeal Judge Malaysia from 2007 to 2012 and as Federal Court Judge Malaysia in 2012 until he retired in January this year.
Andreas Johannes Raymundus Van Strijp is the independent non-executive chairman of the company.
Mr van Strijp, a 65 year old Dutch national, is a mechanical engineer.
He worked for Shell group of companies from 1975 until his retirement in 2007.
Since his retirement, Mr van Strijp has served as a director of Singapore-incorporated Interglobal Offshore Pte Ltd.
Interglobal Offshore Pte Ltd provides drilling and oilfield services to oil and gas companies engaged in E&P activities.
According to page 125 of the prospectus, Mr Strijp was a director of Interglobal Offshore Pte Ltd, together with Myo Thant, a non-independent non-executive director of Sona Petroleum.
He is an electrical engineer with more than 30 years of experience in oil and gas industry.
Mr Myo worked for Shell group of companies from 1991 until his retirement in 2007.
According to page 130, Mr Myo has set up several private businesses since 2007.
10. Is Myo Thant the owner of competing businesses in Myanmar?
According to page 130 of the prospectus, Mr Myo is the managing director of three companies in Myanmar which are family-owned and operate in the mining and oil and gas sectors.
A few pages later, on page 137, Mr Myo is identified as also being a shareholder of all three Myanmar-based companies.
So, does it mean these companies are owned by the family of Mr Myo?
11. Will Myo Thant broker Sona Petroleum's acquisitions in Myanmar?
Not just that, two of these companies are in the business of acquiring and investing in oil and gas acreage in Myanmar.
Further, on page 189 of the prospectus, Sona Petroleum elaborates that the Myanmar companies related to Mr Myo act as local Myanmar partners to foreign investors who are interested in acquiring and investing in oil and gas acreage in Myanmar.
So, if tomorrow Sona Petroleum is to buy a few assets in Myanmar, which it may, as Myanmar falls into its regions of interest, the companies related (or maybe owned) by Mr Myo might be the sellers or local partners.
Sona Petroleum acknowledges that Mr Myo might have a conflict of interest if the company was to acquire assets in Myanmar.
In such a case, Mr Myo, and all those individuals related to him, will abstain from deliberations and voting at the company's board meetings.
Mr Myo and the persons connected to him will also refrain from voting at the shareholders' meeting convened to consider and approve such a transaction (page 189).
Moving on, Mr Myo also serves an independent non-executive director of Target Yedana Sdn Bhd and Promaxus Sdn Bhd.
Pages 128, 137 & 189 show that he serves as the CEO and a director of Interglobal Offshore Pte Ltd, and is also a substantial shareholder of Interglobal Offshore Pte Ltd.
A quick check with Accounting and Corporate Regulatory Authority (ACRA) of Singapore reveals Interglobal Offshore Pte Ltd is wholly-owned by Mr Myo Thant.
And the principal activity of the company is to perform service activities incidental to oil and gas extraction (excluding surveying).
So, after Myanmar-based companies, Mr Myo also has conflicting interests in Interglobal Offshore Pte Ltd.
But Sona Petroleum Bhd doesn't sense any conflict of interest as Mr Myo is just a non-executive director (page 189).
12. Will Sona Petroleum hire the services of Mr Myo's Interglobal Offshore Pte Ltd?
Interglobal Offshore Pte Ltd provides services which Sona Petroleum will need after it acquires the E&P assets.
While there is no guarantee Sona Petroleum will use the services of Interglobal Offshore, the prospectus also doesn't rule this out.
Therefore, how will Sona Petroleum reduce or eliminate Mr Myo's conflict of interests?
Not just Mr Myo, but Mr van Strijp – the independent non-executive director of Sona Petroleum – is a director of Interglobal Offshore Pte Ltd.
So, that makes him interested too.
Mr Myo is also a director and a shareholder of Platinum Autumn Sdn Bhd.
As already mentioned at the beginning of the report, Platinum Autumn Sdn Bhd owns a 20% stake in Sona Petroleum.
The prospectus doesn't mention Mr Myo's shareholding in Platinum Autumn on page 128.
You only find this out after reading page 137 of the prospectus.
And it's page 159 that reveals that Mr Myo Thant owns a 13.45% stake in Platinum Autumn Sdn Bhd.
13. What practical steps will Sona Petroleum take to eliminate the conflicts of interest on its board and at its shareholders' meetings?
14. Will Sona Petroleum's shareholders have to live with conflicting interests of its directors and management?
To be frank, it seems almost impossible for Sona Petroleum to eliminate conflicts of interests in the present circumstances.
15. Does Mr Strijp count as an independent director?
Mr Strijp is employed as a director by Interglobal Offshore Pte Ltd, which is wholly-owned company of Myo Thant.
Therefore, how independent can he be when he sits on the same board as Mr Myo?
16. Why is Sona Petroleum's board dominated by a 20% shareholder?
Out of eight directors on its board, only three are independent.
And the other five directors come from the substantial shareholders of Platinum Autumn, which owns a 20% stake in Sona Petroleum.
And if one excludes Mr Strijp – the independent chairman of the board – because of his link to Mr Myo, Sona Petroleum will be left with only two independent directors.
Therefore, are two/three independent directors enough to look after the interests of about 80% of the shareholders of the company?
With five votes with them on the board, the shareholders of Platinum Autumn are comfortably in control.
Dato' Sri Hadian bin Hashim is the Managing Director of Sona Petroleum.
Dato' Maznah binti Abdul Jalil is the CFO of the company.
Haji Akbar Tajudin bin Abdul Wahab is the vice president, exploration and production.
He has experience of over 35 years in the oil and gas industry.
He is a director and shareholder of Haji S Abdul Wahab Jewellers Sdn Bhd and Wahab Forex Sdn Bhd.
He is also a 9.24% shareholder of Platinum Autumn.
Dato' Saw Choo Boon is the vice president, business development.
He is an independent non-executive director of RHB Capital Bhd, RHB Investment Bank Bhd, Nusa Gapurna Sdn Bhd, Integrated Petroleum Services Sdn Bhd, Shell Refining Company (FOM) Bhd, Digi.com Bhd and Guinness Anchor Bhd.
He is also a shareholder and director of Java Offshore Sdn Bhd, a service provider to the E&P industry.
Dato' Saw Choo Boon owns a 10.08% stake in Platinum Autumn.
Andria anak Dundang @ Andria Gelayan is the vice president, geoscience.
He owns a 5.04% stake in Platinum Autumn.
Dr Tan Teck Choon @ Teck Kiew is the vice president, reservoir engineering.
He owns a 5.04% stake in Platinum Autumn.
17. Do the stakes of the directors in Platinum Autumn count as "an interest" in the company?
On page 134 of the prospectus, Sona Petroleum says except Dato' Hadian and Dato' Maznah, none of its directors are deemed to have interests in the shares, redeemable convertible preference shares and warrants of the company.
But page 159 shows that three other directors – Myo Thant, Mohamed Sabri bin Mohamed Zain and Anton Tjahjono – own substantial stakes in Platinum Autumn, which owns a 20% stake in the company.
Similarly, on page 154, the company claims none of its management team members are deemed to have interests in the shares, redeemable convertible preference shares and warrants of the company, except Dato' Hadian and Dato' Maznah.
Again, page 159 shows that four other members – Dato' Saw Choo Boon, Andria anak Dundang @ Andria Gelayan, Dr Tan Teck Choon @ Teck Kiew, Haji Akbar Tajudin bin Abdul Wahab – own significant stakes in Platinum Autumn which owns a 20% stake in the company.
Did we miss something? Or, is it the prospectus?
Further details can also be found on page 123 of the prospectus.
No operating history
As the group does not have any operating history, it is not possible to judge whether it can achieve its business objective.
Liquidation price would be lower than issue price
There is no assurance that it will be able to complete an acquisition within the three years they have given themselves.
So, the group may be forced to liquidate its assets.
This will lead to a lower per-share distribution than the issue price, due to the expenses incurred in running the business for 36 months.
Additionally, there would be no distribution with respect to outstanding warrants – they would expire worthless.
Conflict of interests
Clearly, with no assets at this time, it depends on the directors and the management.
But as already highlighted in the report, the directors and the management have so many conflicting interests that it is almost impossible to eliminate it from the functioning of Sona Petroleum.
Further details can be found on page 30 of the prospectus.
Sona Petroleum Bhd says it is not engaged in any material litigation and arbitration.
Further details can be found on page 207 of the prospectus.
Sona Petroleum Bhd says its dividend policy will depend on the cash-generating capacity of the asset(s) it acquires.
In the prospectus, the company has not expressed any committment towards paying dividend.
Further details can be found on page 167 of the prospectus.
RM 495 mln for acquisition of assets within three years of listing
RM 46.5 mln for working capital
RM 21.3 mln for listing expenses
Sona Petroleum has managed to raise a gross proceed of RM562.8 mln from Platinum Autumn, 'initial investors' and the IPO.
The company will set aside 90% of the IPO proceeds in the Cash Trust Account to be administered by a custodian.
The funds in the Cash Trust Account can only be used for acquisition of the E&P assets.
Further details can be found on page 23 of the prospectus.
Total Offer Size: 1.1 bln shares
Price per share: RM0.50/share
New shares: 1.1 bln shares
Vendor shares: Nil
Placement shares: 959 mln shares
Public shares: 141 mln shares
KEY FINANCIALS AT LISTING
Market cap: RM 705.4 mln
There are only four (4) reasons companies list:
1. Raise fresh capital for expansion. This is the most virtuous reason, because new shareholders can take part in the growth of the company.
2. Allow existing shareholders to (partially) exit. Frequently this means the best growth days of the company are behind it.
3. Change in laws and regulations. Such as when revised foreign ownership restrictions force existing shareholders to pare down their stakes, even though they might not want to do so. While this gives you the opportunity to buy into companies, you must ask yourself whether how the company is impacted by excessive regulation.
4. Raise the company's profile. New shareholders must ask themselves whether an ego-trip by existing shareholders is a good enough reason to buy into a stock.
"Sharing the growth" is frequently stated in the IPO's publicity material as the reason for listing, but that's just the marketing pitch.
The real reason is only ever one of the four stated above.
Download the prospectus here.
We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.
Sofar, we have not had a reply (which is why you are seeing this message).
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