Friday, January 17, 2014

Sona - NEXT?

To recap in Oct 2013, it was reported that it is closed to making its QA, and the target company is Singapore-listed RH Petrogas Ltd, an O&G company controlled by Sarawak tycoon Tan Sri Tiong Hiew King. Tiong is chairman of RH Petrogas via a 10% placement of shares, as well as acquiring some of its assets, which are offshore O&G blocks.

However later it was reported that Sona will not be taking up any stake in Singapore-listed RH Petrogas Ltd. RH Petrogas. Tiong, whose flagship company is the unlisted Rimbunan Hijau Group, was not too keen on diluting his interest in RH Petrogas.

Sona is now (Oct 2013) in the midst of evaluating other assets. It has moved on from RH Petrogas.

In July 2013, Sona is looking at a few proposals, among them from African exploration and production vendors, to make its first qualifying asset (QA) either in the late development or production life cycle of the oil and gas (O&G) sector.

Africa makes up some 8% of the world’s oil reserves. Meanwhile, gas reserves make up some 7% of the world. There were some 10 countries in Africa which Sona Petroleum was looking at including Chad , Tanzania and Nigeria . In its prospectus, Sona Petroleum said it was looking at the markets of South-East Asia, the Middle East and Africa to make its first QA.

Sona Petroleum raised RM550mil from its IPO, where 90% of the proceeds was put into a trust. Under the Securities Commission’s guidelines, at least 80% of the amount in the trust should be used for the QA, and this acquisition had to be completed within 36 months from the close of the IPO.

Meanwhile a continued depreciation of the ringgit against the US dollar will adversely impact SPACs as the proceeds raised from their IPO will be worth less in US dollar terms than when they were initially listed.

SPACs could be vulnerable to the depreciation of the ringgit as a weakening currency may affect their financial capability to acquire strategic assets. In 2013 alone, CLIQ and Sona have raised rm363 million and rm550 million respectively from the capital markets.

As both companies are planning to acquire overseas assets, any deals will likely to concluded in US dollars. The strengthening of the US currency means these SPACs will have fewer dollars to utilize after conversion from the ringgit. Neither SPAC has made an asset acquisition since listing.

Understanding SPACs ...

As corporation with no operation or income generating business at the point of its IPO, a SPAC is required to make an acquisition within 36 months of its listing. In the meantime, its cash is exposed to foreign exchange risks such as a depreciating ringgit.

SPACs are bound by regulatory guidelines that require them to maintain the IPO proceeds in the local currency. The IPO proceeds are kept in a trust account. It then utilize the money for investments that are deemed acceptable by SC, namely MGS and fixed deposits.

Under Section 6.02 of the SC’s Equity Guidelines, SPACs are only permitted to invest in MGS, money market instruments and AAA rated papers. They are not allowed to hedge their foreign exchange exposure by buying streonger currencies against a weakening ringgit.

The unique structure of a SPAC is meant to safeguard the gross proceeds, which is held in a truct account and controlled by an appointed custodian.

The weakening financial markets present buying opportunities for SPACs, which are now (Sept 2013) able to purchase assets that have gone down in value. The company can choose to either identify cheaper assets or take up a smaller stake in any particular asset.

With rm495 million in its coffers, Sona’s proceeds are worth US148.44 million as at Aug 28 2013.

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Please note that all data given are merely blogger's opinion. It is strongly recommended that you do your own analysis and research before investing.