The short position


  • Business
  • Saturday, 07 Jun 2014

Clarity sought  on Sona

ON the face of it, the maiden acquisition by Sona Petroleum Bhd looks like an impressive one.

The Thai asset they are acquiring has both production and exploration components, meaning one part is producing oil and hence cash flows. while another part is being explored for future development and growth.

But the market isn’t convinced. Why? Part of the reason is lack of details on the deal. While it’s clear that the oil field they are buying produced 12,300 barrels of oil per day last year, it isn’t easy to figure out how profitable the venture is.

Other questions that remain unanswered are: what is the actual acquisition cost on a per barrel basis, what’s the internal rate of return (IRR) of the deal and is Sona actually going to get full control over these assets?

Sona did reveal some basic details of the deal but clearly that does not seem to be sufficient for investors to figure out the actual merits of the deal. The management ought to not waste any time in addressing jittery investors with the finer details of the deal.

The case also illustrates the complexity of these types of deals. It will most likely be a wake-up call to the largely retail group of investors holding Sona shares, to have a better understanding of the sectors these SPACs (special-purpose acquisition companies) operate in. On a more positive note, if Sona has managed to secure a good deal in this acquisition, it could potentially change the profile of the company into a profitable oil and gas producer.

If and when this happens, institutional funds would then have the mandate to invest in this company, thereby injecting more stability into its shareholding base. Sona’s management ought not to waste any more time providing a full breakdown of this deal.

To privatise or not

WHEN IJM Corp Bhd suspended its shares and that of subsidiary IJM Land Bhd from trading yesterday, all bets were on both companies announcing the privatisation of the latter.

At the close of trading though, IJM announced it was still contemplating whether to proceed with the privatisation of its 64.16% owned subsidiary.

“While no decision has been made by the board of directors of the company at this juncture, any decision made will take into consideration, among others, the future growth of the group, future funding requirements within the group; and also the prevailing market conditions,” says IJM Corp in a statement to Bursa Malaysia.

When IJM Corp announced its decision to suspend trading of its stock, it alluded to an impending announcement to clarify its position regarding the corporal proposal to privatise IJM Land.

But should it have suspended trading of both counters for an entire day just to announce that it is still contemplating a privatisation of IJM Land? It could have issued a statement at the market’s lunch break or during trading and taken a short break from trading.

But late last night, IJM Corp issued another statement to Bursa requesting for a suspension of its shares on Monday pending a material announcement involving IJM Land.

Certainly, IJM Corp is weighing whether it should proceed with the proposal to privatise IJM Land and rightly so. There are a number of things it needs to consider before taking that move as it is an expensive outlay.

By saying it is still evaluating the move to privatise IJM Land and then requesting for yet another suspension, what is behind the change in stance regarding its subsidiary?

Requests for a suspension, even a repeated one is not rare, but to ask for another shortly after saying it’s contemplating a corporate move for IJM Land signals interesting developments that is taking place behind the scenes.

Project 4A's challenges

Increasingly, it is looking like Project 4A (the planned 1,000MW -1,400MW power plant project) will continue to be problematic.

Already, the decision to go about it via a direct negotiation route versus an open tender had drawn criticism. And when a conditional award was made to the three parties (SIPP Power Sdn Bhd, YTL Power International Bhd and Tenaga Nasional Bhd) it was clear to experts that this consortium was not exactly a marriage made in heaven. True enough, days after the announcement, TNB issued a statement that it has not decided on whether to proceed working in this team for Project 4A.

As if that weren’t enough, late Thursday night the media received a joint statement from the four unions of TNB, stating that they were against TNB participating in any directly negotiated deal with the government, noting that they preferred it if TNB participated in an open competitive bidding process. The unions also rejected the idea of collaborating with YTL and said this was based on the bitter experience that TNB had gone through over a period of 20 years prior to this.

It is also going to be a tough process to for all the three parties (note that one of SIPP’s shareholders is the Sultan of Johor) to come to an agreement relating to cost and profit sharing in this project.

Power plants are capital intensive projects, in which many technical and financial decisions have to be made. This ranges from the location of the land, the cost of fuel, type of equipment used and finally, the all- important power purchase agreement (PPA) to be inked with TNB.

One wonders if these three parties will ever be able to come up with a workable plan for Project 4A.


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Business , sona , oil , IRR

   

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