This article first appeared in The Edge Malaysia Weekly, on October 19 - 25, 2015.

Global companies like ExxonMobil and state-owned Petroliam Nasional Bhd are raising debt finance to have ready cash in case there is a fire sale of attractive assets in the current low crude oil price environment. 

Interestingly, the three oil and gas special purpose acquisition companies (SPACs) listed on Bursa Malaysia already have large cash piles for asset acquisition. The only difference is that their cash is held in ringgit, whose sharp depreciation of over 20% against the US dollar has eaten into their purchasing power. In a nutshell, any fire sale of oil assets might not be cheap for Malaysian SPACs.

These blank cheque companies are given three years to acquire business assets in a targeted industry after they have raised funds through initial public offerings (IPOs).

Four SPACs have so far been listed on Bursa, with Hibiscus Petroleum the first to go public in July 2011, followed by CLIQ Energy and Sona Petroleum in 2013, and Reach Energy in August 2014. Hibiscus is no longer a SPAC as it has found a qualifying asset (QA). 

CLIQ Energy, which raised RM364 million or US$120 million via its IPO, has seen its proceeds shrink 27% to US$88 million at the current exchange rate (see table). Similarly, the funds kept in trustee accounts by Sona Petroleum and Reach Energy have contracted 22% and 24% respectively in US dollar terms.

To make up for the loss, CLIQ Energy has opted to ask for more money from its shareholders via a rights issue to address a potential shortfall in its QA. The company, which plans to acquire a 51% stake in Phystech II Joint Stock Company, is expected to raise at least RM210 million (US$49.95 million) through the issue.

Even Hibiscus Petroleum has a private placement in the pipeline. Last Tuesday, the company obtained shareholders’ approval for a sizeable placement equivalent to 25% of its current paid-up capital. 

When contacted, Hibiscus managing director Dr Kenneth Gerard Pereira acknowledges that the weak ringgit may cause the SPACs to “pay a little bit more” now for the same assets.

However, he highlights that once a SPAC has secured a QA, the revenue and profit generated by it is in US dollars, which would mitigate the impact of the high price paid for the acquisition. 

Ironically, Hibiscus has yet to deliver impressive earnings since acquiring a QA. Its operating cash flow is still in deficit. 

Like it or not, the depreciation of the ringgit has exposed local SPACs to high foreign exchange risks, something that may not have been given much thought when they were formed. Furthermore, SPACs have to deal with fluctuations in crude oil prices, not to mention potential dry wells. 

“Of course, currency volatility is one of the main considerations but it’s not just about a stronger US dollar and weaker ringgit. Yes, we will probably buy the assets in US dollars but bear in mind that other currencies are also impacted by the stronger greenback,” Sona Petroleum managing director Datuk Seri Hadian Hashim tells The Edge.

He feels that, overall, the present environment is still favourable for SPACs to secure QAs.

Following its failed attempt to acquire UK-listed Salamander Energy Plc’s upstream oil and gas assets in Thailand, Sona Petroleum has turned its attention to Southeast Asia, the Middle East and Africa, aiming to purchase low-risk, small to medium exploration and production assets.

Reach Energy managing director and CEO Shahul Hamid Mohd Ismail also shrugs off concerns about SPACs facing a tough time in securing QAs. “As long as the ringgit does not breach 5.00 against the US dollar, there shouldn’t be a problem. Naturally, we have time, unlike other SPACs. We don’t want to rush into anything. We want to get it right and we want to get the best deal at the best value,” he says.

Reach Energy has shortlisted four candidates in Asia-Pacific and is confident of securing a QA in the next six months.

Shahul says more potential candidates have emerged in the market due to the decline in oil prices since October last year. “It took a while for the vendors to consider whether oil prices may rise again. But now, some of them are feeling the pinch, which will lead to divestments.”

In a July 20 note, Hong Leong Investment Bank (HLIB) Research analyst Jason Tan Yat Teng maintains a “neutral” call on SPACs. He says given the external factors, be it a rate hike by the US Federal Reserve or the economic slowdown in China, and internal issues, such as 1MDB and weak corporate earnings, SPAC investments look attractive, offering returns of more than 10% per annum, which are better than what banks offer for fixed deposits.

In the worst-case scenario, Tan opines, holding SPAC investments to maturity will offer investors attractive returns ranging from 9.6% (CLIQ Energy) to 27% (Reach Energy) to 13.9% (Sona Petroleum).

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