By Stephanie Jacob
Hibiscus Petroleum became the first special purpose acquisition vehicle to be launched in Malaysia, when it listed on the main market of Bursa Malaysia on July 2011. Slightly under a year later, Hibiscus completed its qualifying acquisition to become a full fledged oil and gas exploration and production player. Now just over two years old, Hibiscus faces the biggest test that faces any E&P company; will it hit oil?
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The story of Hibiscus Petroleum began with three people; Ken Pereira, Joyce Vasudevan and Pascal Hos, looking at ways to establish an oil and gas company (O&G) focused on exploration and production (E&P) in Malaysia.
They believed that they had the expertise, what they needed was the funds.
“We were looking for a way to set up an E&P using the capital market…and at that time we had friends in Petronas who told us that Malaysian companies would soon be allowed into the (E&P) market,” says Pereira who is managing director of Hibiscus.
Eventually he says that this access took the form of risk sharing contracts (RSC), but it was still an indication that this market would be opened up to Malaysian companies, and this presented an opportunity for entry into the sector.
It was by coincidence that in August 2009, the Securities Commission decided to introduce the concept of special purpose acquisition companies (Spacs) to the Malaysian financial scene. So after finding other business models unsatisfactory, the trio turned their attention to the Spac concept in early 2010.
Being the first group in Malaysia to actively look into setting up a Spac, Hibiscus had to largely create their own structure. In a country that was unfamiliar with the concept, this proved a challenge, says Vasudevan, who is the company’s chief financial officer.
“It took us about five months to define it. We started with something totally different but after going and speaking with potential investors and investment banks, we had to finetune our model,” she explains.
Pereira says that the concept was so foreign to Malaysia, that they wasted a few months working with a local investment bank, that simply could not come to terms with the Spac model. Therefore he says, Hibiscus had no choice but to develop much of it themselves, before finally taking it to Hong Leong Investment Bank who helped tidy it all up.
Spac is technically not a new business model, as internationally, especially in the United States and South Korea, there quite a number of such companies. However borrowing their blueprint entirely was not an option for Hibiscus.
For one, Spacs in the United States cover a wide variety of sectors and industries and is therefore difficult to replicate. In addition, the regulations that govern them are also different from those put in place by the Securities Commission.
Secondly, and more importantly, Spacs have had extremely varying levels of success in America for a whole host of reasons.
South Korean Spacs seemed like a better guide, and therefore Hibiscus studied their model quite closely.
The primary lesson that came from South Korea was the importance of good shareholders.“The South Korean model showed us the importance of getting the right kind of shareholders to invest in a Spac…the shareholders had to bring stability,” says Pereira.
We realised the need to have a shareholder base that was not interested in control. If you have a shareholder base that is interested in control, then there is the risk of one person or group becoming a driver, Pereira explains.
“By having our largest shareholder holding about 10% and not really interested in whether they have got control or not, then you are able to go back to the market (to get more funds when necessary)…so long as you grow the pie,” he adds.
He explains that this is key because any E&P company requires a lot of funds, which is also the reason why Hibiscus believed it was so important to operate in the capital market.
Hibiscus listed on the main market of Bursa Malaysia in late July, 2011 as not just the first Spac in Malaysia, but in South East Asia as well. On its debut on the market, Hibiscus saw its shares fall by 29% to 53 sen from its issue price of 75 sen.
Subsequent to that however, Hibiscus shares have risen steadily and today trade at around RM1.48, while its warrants are at around 94 sen.
According to an RHB Research analyst report titled ‘Place your bets here’, Hibiscus share prices could potentially reach RM2.77, if Hibiscus hits oil in Oman later this year.
Hitting oil in its Block 50 Oman concession is something that Hibiscus is quite confident of achieving, and their assuredness comes from their access to a technology that they claim gives them an edge in identifying if there is oil under the surface in Oman,
Slightly less than a year after listing, the company completed a qualifying acquisition in the form of a 35% equity stake in Lime Petroleum Plc (Lime), making it officially a fully fledged O&G company in the area of E&P.
According to Hibiscus, Lime was chosen for two key reasons, first that it had four concessions in the Middle East, and secondly because it had a suite of proprietary technology called Rex Technology.
This technology is touted by Hibiscus as being able to better interpret data and determine if there is liquid hydrocarbon in the concession areas, which reduces the risk of unsuccessful drilling and increases efficiency. In a business where for every six or seven wells drilled, only one is successful; this technology could be a game changer.
It is this technology that Hibiscus is now banking on to come through for them, and the test will be in October when the company begins drilling two wells; Masirah North North and Masirah North East.
According to Hibiscus, these are the wells that have been identified as the most promising by Lime’s technology, “the selection of these two wells have been primarily governed by the use of the Rex Virtual Drilling technology. When we are successful there we will dispel concerns that remain about Rex Virtual Drilling,” said Pereira at a press conference following a recent annual general meeting .
The point was reaffirmed by Hibiscus chairman Zainul Rahim Mohd Zain, “this will prove once and for all (that the technology works)…as no company has actually drilled (where Rex Technology has been used)…we will be the first.”
He added that it will have a knock on effect, because there are several other concessions in Hibiscus’ portfolio, which according to Rex Technology seem to have plenty of potential. Therefore says Zainul, success in Oman could change the face of the E&P business.
But, what if they fail?
Should the drilling exercise in Oman fail, then Hibiscus shares will definitely fall. but the repercussions are likely to be greater than that, despite the fact that over the past two years, Hibiscus has worked on balancing its portfolio to add development and production assets.
“One of the things we learnt, prior to starting all of this was that companies that are sustainable in this industry have a balanced portfolio…you must get to the point quickly where you have revenue capable of funding the exploration,” says Pereira.
As such, Hibiscus have acquired a 13% stake in an Australian listed company called 3D Oil Limited (3D Oil) and a 50.1% stake in the later VIC/P57 permit (concession) located in the Gippsland Basin off south-eastern Australia.
According to Hibiscus, the permit contains a proven discovery of 9.2 million barrels of oil in the West Seahorse field and a few exploration prospects. With this asset in hand Hibiscus says that with or without success in Oman, the company should begin to see revenue being generated by the end of 2014.
At its recent AGM, Hibiscus also announced that it had been shortlisted for the second round of bidding for Newfield Exploration Co’s Malaysian assets. Should they be successful, then they will have a production asset in their stable as well.
Nonetheless, no oil in Oman will still prove a serious setback for the company which has banked a lot on the unproven superiority of Rex Technology for so long.
Moreover it will do serious damage to the prospects of HiRex Petroleum which is a joint venture agreement with Rex South East Asia Ltd. Via this company, Hibiscus has first right of refusal to utilise the Rex Technology Package in 11 countries in the Asia-Pacific region.
If the technology does not come through in Oman, it is unlikely that there will be many companies knocking on Hibiscus’ door to secure its use.
Hibiscus might also find itself in a bit of trouble in terms of share price. According to the RHB Research report, if the company is wrong about Oman prospects, then its share price could potentially drop to RM1.18. Hibiscus might see its shareholders cashing in while they are still making a more than 50% profit on their initial investment.
With no moratorium in place to prevent anyone from offloading their shares, the average shareholders might also be forgiven for wondering how committed the promoters and initial investors are to the cause.
Promoters such as Pereira, Vasudevan and Hos along with the rest of the management team hold a 20% stake or slightly more than 55.57 million shares of Hibiscus Petroleum via Hibiscus Upstream. Plus this together with the one-for-one free warrant, Hibiscus Upstream collectively holds 111.14 million shares and warrants.
These were initially purchased for about RM1.1 million or 1 sen each. Today, Hibiscus Petroleum share plus warrants trade at RM2.44, which makes the same shares worth about RM270 million.
This means that Pereira who holds a 57.4% stake in Hibiscus Upstream has already seen his investment grow to around a RM155 million at current prices, while both Vasudevan and Hos’ initial investment is now worth about RM24 million each.
Can the regular shareholders count on the promoters and management team to not jump ship should this effort fail? Of course the management team have their reputations at stake and this will likely drive them to remain committed.
Furthermore as the poster child for Spacs in this country, what happens to Hibiscus will inevitably affect the market for the other two existing Spacs. Questions will also fairly or unfairly be raised to as whether or not the Spac model is sustainable or not, which will have an impact on future Spacs.
Suffice to say that the last quarter of 2013, is not just going to be crucial for Hibiscus Petroleum but also for the overall sentiment of the Spac model in Malaysia.
Yesterday: The idea behind Spacs.
Tomorrow: Are Spacs a safe investment?
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