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Halim racing to reverse Sumatec’s fortune
F Saad 
Halim is Sumatec’s largest shareholder with a 12.7% stake
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It is not surprising that after several false starts, minority shareholders and potential investors are still not fully convinced Sumatec Resources Bhd’s Rakushechnoye oil and gas (O&G) field venture in West Kazakhstan is the real deal.

Sumatec’s largest shareholder Tan Sri Halim Saad has a tough task convincing minority shareholders they will finally see the company making steady profits, six years after the deal was first proposed.

Dalton resigned as Sumatec CEO in December 2015 

Sumatec languished in PN17 status from May 2011 to September 2014, and several senior executives, including managing director James Chan Yok Peng and CEO Christopher Dalton, have since left. Abu Talib Abdul Rahman, supposedly Halim’s close business associate, is the current managing director.

During that period, the company also proposed a US$290 mil acquisition of the Buzachi oil fields, also in Kazakhstan, which has not been completed.

Sumatec shareholders will need more to be convinced before agreeing to pay the US$370 mil (RM1.55 bil) asking price for Markmore Energy (Labuan) Ltd. The latter holds the entire participatory interest in CaspiOilGas LLP, which in turn is the concession owner and operator of the Rakushechnoye field.

In January, CaspiOilGas inked a presale agreement with Kazakhstan-based NIPIneftgas Consortium, including the sale of 6.2 billion cubic metres of gas to the consortium for 15 years at market price.

Abu Talib, a shareholder of Markmore Energy, is also Sumatec managing director

However, with Halim’s pitching the Rakushechnoye deal to shareholders, it seems they may be better off giving their green light.

“The deal is good for the company because production cost is low and, at current oil prices, it is still very profitable. It is the only option as the company does not have enough cash. Its shipping segment is in the process of winding up and any cash or assets will be given to creditors first, which means Sumatec can’t produce on its own.

“If the shareholders do not agree, I’m still happy. I can simply sell my shares and go, but I’m doing this to help the company. That is why I am giving this oil licence to Sumatec (via the arrangement). With this, the company will be able to raise funding,” Halim tells FocusM.

However, an analyst sees things a little differently. “Shareholders will want to see Sumatec making money from the gas deal first. Sumatec also needs to sort out its financial position. Perhaps they would prefer a participating equity in the Rakushechnoye gas-to-liquid plant (GTL) plant instead of paying out a huge amount of money to buy Markmore Energy outright. They will have little say though, as Halim owns a large stake in Sumatec,” he says.

 

15-year gas deal

On Jan 22, Sumatec announced its partner CaspiOilGas had inked a 15-year pre-sale deal to sell gas to the NIPIneftgas Consortium in Kazakhstan. CaspiOilGas, which is 100% owned by Halim’s Markmore Energy, would sell 6.2 billion cubic metres of gas or 36.5 million barrels of oil equivalent (BOE) at market price, which would come from the Rakushechnoye oil field.

Halim is the sole shareholder of Markmore Central Asia BV, a company incorporated and registered under the laws of the Netherlands. Markmore Central owns CaspiOilGas, a limited liability partnership incorporated and operating in Kazakhstan.

The proposed capital expenditure for the gas utilisation plan, which is tied to the gas development production agreement between Sumatec and CaspiOilGas, will start at US$60 mil, with a total capital expenditure of US$360 mil to bring the plant to full capacity. The first phase of the operations will start in 2019.

In 2002, Rakushechnoye was awarded a 25-year subsoil user rights, similar to a concession. During this period, the exploration leases can be converted into mining licences.

The presale agreement allows CaspiOilGas and Sumatec to take up a participating equity in the GTL plant at a later date, should the companies decide to opt in.

“Sumatec will receive a share of the oil/condensates produced, as well as the fee for processing the raw gas prior to the sale/supply to the NIPIneftgas Consortium,” said Sumatec.

Halim has invested RM900 mil in Sumatec and the Rakushechnoye oil field. He is Sumatec’s largest shareholder with a 12.7% stake, followed by Siti Hani Abdullah with 0.87%.

 

Why so long?

Why is the Rakushechnoye deal taking so long?

“Oil price has dropped to a low level. The second issue we faced was gas production. We have to treat the gas that comes up with the oil. For one year, we did not treat the gas, but instead we took out the oil and injected the gas back into the ground.

“We are not allowed to burn the gas due to environmental concerns. The Kazakh government is very strict about this. The gas is still ours for future use. We can take it out to be processed and sold at a later date,” says Halim.

The Kazakhstan project is a workover, which is an oil well intervention. A workover involves the process of pulling and replacing a completion (a ready well) to bore deeper into the earth, where there are more oil and gas reserves.

Initial production for the first workover well began in January 2014, and include restoring and optimising 12 existing wells, as well as installing six new ones, to achieve a target production of 2,000 barrels per day (bpd) within two years. Production is expected to touch 1,500 bpd by end-March.

 

Low production cost

Halim says the cost of production for onshore projects is low, something that shareholders will want to consider.

“Our cost is around US$16 per barrel, including taxes. Assuming oil price (stays) at US$60, there is a margin of at least US$44 per barrel.

“Although prices have stabilised in recent weeks, US crude inventories from cheap shale production threaten to keep prices low. The margins will still be attractive.”

Rakushechnoye is located onshore and its flat desert terrain and medium-depth reservoirs contribute to lowering capital and operating costs. The average onshore production cost throughout Kazakhstan is US$27.80 per barrel, he says.

The high quality of crude produced at the field will also give a competitive edge in the global market. Rakushechnoye oil, he adds, has zero sulphur content, compared with Brent which has 0.028%.

For Q4FY17 ended Dec 31, Sumatec posted a net loss of RM65.54 mil, from a net profit of RM1.51 mil a year ago, while revenue was RM16.85 mil, up 107.7% from RM8.11 mil.

 

Unpaid fees

According to Sumatec, as at Dec 30, 2016, Markmore Energy owed the company RM185.05 mil for work carried out on the Rakushechnoye field. Auditors were unable to ascertain its recoverability as they were unable to obtain sufficient audit evidence.

This is unfair to minority shareholders, says a corporate governance consultant. “The original agreement was that this amount was the fee for works carried out by Sumatec on the oil field. However, Markmore Energy‘s other shareholder, Abu Talib, is also Sumatec’s managing director.

“It is not illegal, but shareholders can raise this question. The fee was to provide a steady income to Sumatec while the works were being carried out over the three-year period. If the presale agreement had not happened, the shareholders would be left high and dry. There is still no guarantee the outstanding fees will be settled in a timely manner,” says the consultant.

Income from the gas stream was mentioned separately. Markmore Energy was to pay US$0.75/MSCF (thousand cubic feet per day) once supply of gas commences to the offtaker.

Under the agreement, Sumatec was to pay a signature bonus of US$10 mil to Markmore Energy, along with a refundable performance deposit of US$40 mil plus a non-recoverable cost reimbursement of US$85 mil. It is not clear when these payments were made, if they were made at all.

“The amount owed to Sumatec has to be taken from the production. The auditors could not ascertain recoverability because the money is from the oil field production. On paper it looks like I owe Sumatec, but the truth is, the company has to pay itself from the production. The amount owed is deducted from the production amount. This is another reason why I’m giving this licence to Sumatec,” says Halim.

Sumatec says it recognises this as a long-term receivable whose recovery should be attributable from the gas production stream.

 

Buzachi proposal

In 2014, Sumatec proposed the purchase of a 100% stake in Borneo Energy Oil & Gas Ltd for US$250 mil in cash and shares. Abu Talib and Dr Murat Safin are the shareholders of Borneo Oil and Gas, which in turn owns 100% of Buzachi Neft LLP.

Buzachi has two 25-year subsoil use contracts, valid until November 2026, to explore and produce oil and gas in Karaturun Vostochnyi and Karaturun Morskoi fields, also known as the Buzachi fields. Drilling on site began in 2007, with a volume of 400-600 bpd. Buzachi has invested US$80 mil in the project.

The deal was originally priced at US$350 mil, but was reduced to US$290 mil – US$190 mil for the oil fields and US$100 mil for ancillary assets – following the sharp drop in oil prices that year.

Of the US$290 mil, US$210 mil was to be settled in cash with the rest in shares.

In February 2016, Sumatec and the owners of Borneo Oil & Gas agreed to defer the final amount of US$75 mil to be paid in stages from Dec 31, 2016 to Dec 31, 2019.

“We will keep in view the Buzachi project for now to revisit in future. It’s too much to handle if we do both,” explains Halim.

Sumatec, in a bid to move away from its legacy issues, could undergo a name change in the near future, pending board approval, he adds.

 

Political stability

Shareholders will also have little to worry about Kazakhstan’s political stability. “Outside the former Soviet empire, it is the most politically-stable country and also one of the most developed,” says Halim. The country ranks 35 in the World Bank’s Doing Business 2016 rating.

Kazakhstan’s land mass sits on 3% of the world’s total oil reserves, and 62% of the country is occupied by oil and gas fields. There are 170 oil fields, of which over 80 are under development. The country produces an average of 1.3 million bpd.

The Kazakh government is also looking at a less tedious tax and customs legislation, and plans to increase production to three million bpd by 2020.

Malaysian companies and investors in Kazakhstan have implemented projects in oil and gas, agriculture, engineering and construction worth US$1 bil.

Kazakhstan’s O&G industry is said to be the most promising avenue for collaboration with Malaysia, with projects in upstream and downstream development projects and servicing.

Besides Markmore Energy, other Malaysian companies with a presence in Kazakhstan include Kenmakmur Holding Sdn Bhd, Reach Energy Bhd, Melewar Industrial Group Bhd, Hadid Engineering (M) Sdn Bhd and Alladin Group.

Poster boy of the business world

Many know Tan Sri Halim Saad as the man behind Renong Bhd, which controlled UEM Group, in the 1990s. Both companies were high profile in the political and corporate arenas. In his hey day, Halim was known as the poster boy of the business world.

The 65-year-old executive chairman and substantial shareholder of Renong was often labelled a protégé of former finance minister Tun Daim Zainuddin. He was credited with the construction of the PLUS North-South Highway, the group’s moneymaker.

The Renong stable included Hatibudi Nominees Sdn Bhd and Fleet Holdings Sdn Bhd, which owned PLUS Expressways Bhd, Commerce Asset Holdings Bhd (now CIMB), Crest Petroleum Bhd (the forerunner to SapuraKencana Petroleum Bhd), and New Straits Times Press (M) Bhd (NSTP). Halim was CEO of NSTP in the 1980s.

He lost his grip on Renong/UEM in the aftermath of the 1998 Asian financial crisis, before exiting corporate and public life in 2001. He kept a low profile, occasionally popping up in local listed or unlisted companies, until he started making headlines again with Sumatec Resources Bhd in 2013.

He filed a RM1.3 bil lawsuit against the government, Khazanah Nasional Bhd and Tan Sri Nor Mohamed Yakcop over the sale of his interest in the Renong/UEM Group to Khazanah in 2001.

Halim claimed he was to be paid RM1.6 bil for facilitating the takeover of Renong in 2001 after a series of meetings chaired by then prime minister Tun Dr Mahathir Mohamed, and subsequently handled by Nor Mohamed.

However, Khazanah and Nor Mohamed have claimed the shares belonged to Umno. The suit was dismissed by the High Court based on the Limitation Act which states that civil suits have to be filed within six years.

Some have claimed the lawsuit would have revealed the identity of the parties responsible for UEM’s purchase of a 32% block of shares in Renong, which caused the latter to collapse.

The Renong stable included Fleet Holdings which owned PLUS Expressways


What made Halim tick, both in the past and recent years? He shares his thoughts with FocusM.


How and when did you get into the oil and gas (O&G) business?

It’s not a new venture. I’ve actually been in the business for a long time, ever since my days with Sapura (which was then Crest). Over the years, I’ve travelled to nearly 40 countries looking for the right opportunities, and I’ve studied this area in depth.

 

What made you decide on Kazakhstan?

Of all the former Soviet Union countries, Kazakhstan is the most politically and economically stable. In terms of ease of doing business, the country ranks highly as well, although not many people are aware of this.

We also have to consider that the days of offshore oil are over. It is too expensive, and you can only be profitable if you have a huge oil field. If you are a small player and go offshore, you are finished. A large portion of reserves in Kazakhstan are onshore, so the cost is much lower. With the current oil prices, it makes more sense to look onshore.

 

Are you keen on oil opportunities in Malaysia or Southeast Asia?

Not at the moment. The opportunities are onshore. Rakushechnoye is also a big field, so we will focus on that first.

 

Where is the money coming from? You’ve spent about RM900 mil on Rakushechnoye.

(Laughs) It is my own money. It’s too late for me to get out now!

 

Do you think Sumatec’s board of directors would be keen on a company name change?

We can only try and see what they think. Why not?

 

How do you spend your free time and what is your working style? You’re known to be a bit of a workaholic.

(Laughs) I don’t have a particular style, and I work all the time. It’s what I do.



This article first appeared in Focus Malaysia Issue 274.