Sumatec- buying a Kazakh PSC!

Sumatec has risen from a low of RM0.05 in August to a recent high of RM0.335 on N0vember 25. The news has finally been announced that Sumatec will acquire CaspiOilGas LLP, an Oil & Gas company with a Production Sharing Contract ('PSC") in Kazakhstan. CaspianOilGas LLP is an indirect subsidiary of Markmore energy Sdn Bhd, a company that is 99.99%-owned by Halim Saad, the former Chairman of Renong.

There are a few things that we need to know about this Kazakh PSC & Sumatec. The PSC was first awarded by the Kazakh government in Aug 26, 2000. The "proved plus probable" hydrocarbon reserves was estimated by SRK Consulting (Australasia) Pty Ltd, a mining consultant to be about 122.3 million barrels of oil equivalent. The source of these two news snippets is BTimes (here).

I am not impressed with CaspiOilGas LLP for two reasons. Firstly, it is a very old PSC, which must have been passed through many hands. Secondly, the "proved PLUS PROBABLE" reserves leave a lot of room for doubt. You can contrast CaspiOilGas LLP with another company which is working on a number of oil fields in Northern Iraq, Gulf Keystone Petroleum('GKP'). GKP is listed on FTSE. Check out this link at FT Alphaville (here). You may be interested to know that Malaysia's richest tycoon, Robert Kuok has recently invested only 3.19% in GKP despite numerous reports that GKP has substantial proven oil reserves (here). The reason is simply this: PSC is a very risky business. For Sumatec to buy into a company with a PSC that's of highly uncertain potential is an extremely risky venture.

Sumatec is a very weak company. The proposed acquisition of CaspiOilGas LLP is the company's 2nd restructuring since its listing in 1999. The company was first listed as Malaysian General Investment Corporation Bhd ("MGIC') in 1999. MGIC ran into trouble & was restructured in 2003, with its listing assumed by Sumatec. Now, it is Sumatec's turn to be restructured. As at 30/6/2011. Sumatec has Assets totaling RM746 million, which are financed by Equity of RM111 million & Liabilities totaling RM635 million. Of these Liabilities, Borrowings totaled RM544 million. Of the Assets owned, Property, Plant & Equipment totaled RM645 million.

I am always very suspicious of any company that has undergone a restructuring scheme. The reason is simple. The existing or old shareholders would not accept a fair amount of losses. The existing or old creditors would always hold out for more. The new shareholder would strangely agree to this less-than-satisfactory hair cut on the part of the existing shareholders & creditors in order to get control of a listed vehicle. We can speculate about the Whys until the cows come home but it is undeniable that restructured companies are inherently weak as some of their assets cannot be fully realized. How does the new shareholder protect himself? By overvaluing the business or assets that he intends to inject into the sick company. The only thing that you can be absolutely sure of in the accounts of a restructured company is its liabilities, which should be stated in full.

If Sumatec has gone through one round of cosmetics grossing-up when it morphed from MGIC to the current Sumatec, imagine how it would look after it underwent another round of 'surgery'. The new Sumatec would look more horrifying than Jocelyn Wildenstein. Some details of the new proposed restructuring scheme or regularization plan were given in the report by the Star. To wit:

The company said it was currently finalising the regularisation plan and would announce the details upon finalising the terms of the proposed PSC.

It said as part of the agreement, the company proposed to reduce shares at par value by 50% to 17.5 sen per share from 35 sen. This would also reduce existing issued and paid-up share capital to RM37.51mil from RM75.02mil.

To raise capital, a new share-placement exercise “by way of placement to new third party investors to be agreed by Markmore Energy and the company” was being proposed as well as a proposed renounceable rights issue of shares at par to entitled shareholders.

The share-placement exercise would raise gross proceeds of RM15mil while the proposed renounceable rights issue would raise gross proceeds of up to RM445mil and would take place following the completion of the capital-reduction and placement exercises.

For more, go here.

I have appended below the semi-log chart for Sumatec. The stock is in a downtrend. If you draw an irregular downward channel connecting the peaks & the troughs, then the stock had recently tested the 'upper channel' at RM0.33. Based on the chart, I see very little upside but plenty of downside to this stock. For those fortunate enough to hitch a ride on this horse recently, I think it is high time that you take a walk.


Chart: Sumatec's weekly chart as at Nov 29, 2011 (Source: Tradesignum)