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Petroleum – Kenneth Pereira, Managing Director – Malaysia

The managing director at Hibiscus, which started out as a special purpose acquisition company (SPAC), discusses the benefits of the unique company structure and about his ambitious growth plans for the first five years of the business.


Hibiscus was the first special purpose acquisition company (SPAC) to be listed on the local stock exchange. Why did you choose to set up a SPAC as opposed to an exploration and production (E&P) company?

The primary reason why we chose to set up a SPAC structure as opposed to a traditional private equity funded E&P company was to do with objectives we wished to achieve in the final capital structure. At the time there were only two funding options open to us: the first option was to approach private equity houses, and the second was to go down a more unconventional route of attempting to implement the first, SPAC structure in South East Asia. As a world economy, the 2010 period was a time during which we were just exiting a global scale financial crisis. Many junior E & P companies operating in our region were struggling to fulfill work program obligations and some were defaulting. We also had feedback from some regional regulators that junior E & P companies, funded by private equity houses were viewed with caution. So we looked at a SPAC structure very seriously.

After some serious thought, we decided to opt for a financial structure where we had visibility over our own funds and the market and regulators had transparency over how we would fund our obligations, and the SPAC financial structure offered this. We raised the money, put it in a trust account to demonstrate to investors that their funds were safeguarded, made public our financials and then started to prospect for assets to acquire.

Another key benefit that the SPAC financial structure offered is diversity of the shareholder base. We wanted to avoid having a controlling majority shareholder dictating the business direction of the company; instead we went with a capital structure that resulted in every shareholder, including the management team, being a minority equity participant in the equity of the company. On our IPO we had approximately 4,500 minority shareholders in a structure that we believed would be most aligned in terms of business objectives. An experienced and industry-knowledgeable board that ran the company was then obliged to make decisions on what was best for all shareholders as opposed to a few. At the time, we were probably the only company in Malaysia in which a professional management team had the largest stake in the equity of the company and all shareholders, held a minority holding in the capital structure. The largest stakeholders were the management but they were also minority shareholders as well.

Can you please give us an insight into how you achieved such a successful IPO without having purchased any assets?

The fundamental concept of a SPAC is a structure that is listed initially without any assets or operations. It is a matter of public record that we raised approximately US$ 80 million using this structure on the Main Market of the Malaysian stock exchange to pursue an E & P business. Whilst it common knowledge that Hibiscus Petroleum was the first SPAC in the region, it is perhaps less widely known that we are also the first listed Malaysian IOC.

I put the initial fundraising success down to the strength of the board and the high level of industry experience that we had between the board and the management team. In the early stages of the company, the management team comprised only three paid executives. It was probably the smallest company from a HR perspective listed on the Main Market of the Malaysian stock exchange at the time. As a management team, there was myself, our CFO, Joyce Vasudevan and our Head of Petroleum Engineering, Dr. Pascal Hos. As well as the three core members, we also had a non-executive board that was comprised of five individuals, each with very strong industry-based backgrounds. I believe the Malaysian Stock Exchange and the Securities Commission recognized the vast amount of industrial experience present in both board and management team and reacted favorably as a result with an approval to proceed with our IPO.

Hibiscus has raised a total of RM 235 million (approximately USD 72.12 million) from its initial public. Three years later, where has the money been allocated?

We have had a multi-phased approach to raising finance and over the past three years raised in total sum of approximately USD 160 million. Initially we raised a RM 235 million (USD 72.12 million) round from our IPO. Subsequent to that, we raised a further RM 100 million (USD 30.69 million) at the end of 2012 to early 2013 in a preference share issue. The warrants we issued at IPO matured in July 2014 and thanks to 99.7 percent of our warrant holders exercising their warrants, we raised a further RM 170 million (USD 52.17 million), in effect raising funds in three different rounds. The market capital of the company today is approximately USD 420 million so we have achieved close to a three times return with the equity that has been invested so far. Furthermore more than 60 percent of our IPO shareholders have retained or increased their equity positions over the past three years since our IPO. We are particularly pleased about that statistic.

During the formation of the company and having started without owning any assets, how did you initially select which regions and types of assets you would investigate?

Initially, in a new oil and gas company as with other industries, there are so many factors which need to be considered and it can be very difficult to be precise on your criteria. We knew we wanted a diverse portfolio and we knew we wanted to acquire both development and production assets in a balanced portfolio. We also knew that we had combine stability, a good ‘geological address’ and upside potential.

For our first acquisition, we identified about 15 different opportunities that we deemed appropriate to take to the next stage and then we walked through a selection process over a three month period, being as objective as we could. It was not an easy task finalizing our position and it was helpful that we had a knowledgeable board that provided the necessary guidance each step of the way.

We also had to be mindful that we needed to provide an adequate return to the IPO shareholders who had, in a sense, funded the management carry during the IPO exercise. Our strategy for initial asset selection was consistent with the risk profile that we had established through the formation of Hibiscus. As a SPAC, we saw ourselves as a moderate risk investment proposition. Hence, we felt our shareholders wanted to see opportunities brought into the company that were of a moderate risk profile. It was satisfying that when shareholders voted for our initial qualifying acquisition, over 99 percent of the voting shareholders approved our proposed transaction.

One interesting point we noticed early on was that the capital markets valued pure explorers very differently to producers. Pure explorers were valued on their prospective resources and the potential excitement the drilling activities to convert those prospective resources would generate. Producers, on the other hand were valued less aggressively. We therefore concluded that if we wanted to raise money going up the value creation curve, we mostly likely had to start with something in exploration or development and demonstrate our oil finding capabilities. There is an element of risk inherent in this approach but that is something, we believed our shareholders had factored in from the start.

Hibiscus was the first SPAC to be listed on the Bursa Malaysia (Malaysian Stock Exchange). What is your view on the recently introduced rules for SPAC IPOs to improve investor protection?

The recently introduced rules for SPAC IPOs are a natural progression for the market and change is inevitable. You have to start with a base line, and Hibiscus was fortunate enough to be one of the first to utilize SPAC structure. However, recently there has been an influx of applications and businesses looking to utilize a SPAC structure, and this in turn has allowed the authorities to be more selective and raise the bar to entry.

The interesting point is that even with the new guidelines and rules in place, there is still a high interest for SPAC structures and IPOs. There is also been a high level of financial liquidity chasing SPAC equity. What we need to recognize now is that there is a fine balance between raising the bar to protect investors and creating an opportunity that is truly exciting both for the entrepreneur and the investor. I do not believe that it is in the best interest of any of the stakeholders  to curtail the entrepreneur’s scope for creating value through innovative concepts.

You are quoted saying that your mission is to discover 100 million boe and achieve production levels of 10,000 to 15,000 boe/d by 2016. What are the major steps that need to be implemented to reach that level and are you on schedule?

There is a very real opportunity to discover our 2P/2C target of 100 million boe by 2016 i.e. within the first five years of our IPO. The combined prospective resources we are chasing, net to Hibiscus is well in excess of 100 million barrels and we expect to be drilling 5 exploration wells in 2015 hoping to contribute to this target. Subject to the closing of the Kitan transaction, which has already been disclosed and the implementation of our West Seahorse development in the Bass Strait of Australia in early 2016, we will also be close to or perhaps even in excess of our production target of 10000 boe / day net to Hibiscus. What we have found is that if you achieve these type of metrics, you will be valued at around USD 1 billion at US$ 100 / bbl oil price. This is our goal and I think it is a very realistic objective to be achieved within 5 years of our inception, i.e. in 2016, subject of course to macro conditions in the global capital markets.

Hibiscus’ current portfolio compromises interests in Europe, Australia and the Middle East. What could you tell us about the synergies between these assets and why did you acquire such a geographically diverse set?

The geopolitical diversification of our asset portfolio was an organic process. It started in the Middle East through our participation in the equity of Lime Petroleum. Lime then organically grew acquiring a range of assets in Norway. Lime Petroleum had access to certain proprietary technologies which gained acceptance with some players operating in Norway and we quickly gained traction and an operating foothold there.

Whilst our projects in the Middle East and Norway have been exploration focused, our efforts elsewhere have been based around a plan to balance our portfolio. Having proved ourselves as an operator elsewhere, we are now looking seriously at opportunities in Malaysia. PETRONAS has very specific criteria and expectations of the type of operators they invite to participate in the Malaysian space. We would like to be a player in our home market sooner rather than later and as we have added considerable value in the assets of other governments, we now hope to have the opportunity to do the same in Malaysia. Please be aware that the Hibiscus is the national flower of Malaysia so at some stage, we need to plant some seeds in our home soil and be a participant in our core activities domestically.

You have also recently partaken in a joint venture with Rex. How would you summarize this joint venture and what benefits has it brought to Hibiscus?

Exploration is an extremely expensive and risky activity and any tool we can use to help us ascertain and mitigate the risks involved should be considered a benefit. Rex International Holding, listed on the Singapore Stock Exchange owns the intellectual property rights to certain software based technologies which may be used to de-risk exploration plays. Our partnership with Rex allows our joint venture companies exclusive rights in 27 jurisdictions to the use of this technology.

One example where we utilized the Rex technology suite to great effect was in eastern Oman. The basin in which we discovered oil had previously been investigated by other reputable E&P companies. They had deemed the area was lacking in hydrocarbon source rock and thus devoid of any potential for a petroleum discovery. Using the Rex technology we identified several prospects and convinced ourselves that there was sufficient justification to explore the area and after several seismic surveys were conducted, we drilled a couple of wells and we made a discovery!

A conference is scheduled to be held in Oman at about the end of this year to highlight offshore opportunities in eastern Oman. This discovery has opened up the eastern Oman offshore sector and the larger players are now starting to take the area seriously. Total have secured some blocks offshore in Oman and others are now knocking on the door of the government.

The technology definitely gave us the courage and the confidence to drill those successful wells in Oman and we look forward to working with Rex in many more opportunities going forward.

Being a Malaysian company based in Kuala Lumpur, do you see Malaysia as the hub for oil and gas in Southeast Asia?

There is business here for contractors and capital expenditure is being expended in a very big way. There are innovative projects chasing production from small fields as well as the larger PSC type projects. Large international companies are here in the market and are currently operating.

With business opportunities and human capital available and the fact that Malaysia is generally a comfortable and peaceful as a place to live, I believe it is one of the leading oil and gas hubs globally and regionally. Hopefully the momentum in this business sector continues, driven by the activities of PETRONAS so that it advances in significance as a place that the oil and gas community recognizes as a relevant business hub.


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