Can Sumatec escape PN17 again?

Company’s shares hammered after falling into that unwanted status for a 2nd time since 2011

SHARES of Sumatec Resources Bhd took a beating this week, plunging over 30% after external auditor Grant Thornton Malaysia cast doubt on the oil and gas (O&G) firm’s ability to continue as a going concern – turning it into a Practice Note 17 (PN17) company.

At 5pm yesterday, the stock ended half-asen higher at 4.5 sen.

This is not the first time that Sumatec has been categorised a PN17 company.

It was categorised under that status in 2011, resulting from its auditors expressing a disclaimer opinion in relation to its audited financial statements for the financial year ended Dec 31, 2010.

However, it was lifted in September 2014 after the company completed a regularisation exercise.

The question is – can Sumatec pull it off again?

According to listing requirements, a company needs to chalk up two consecutive quarters of net profit to exit from PN17 after having completed its regularisation plan.

Sumatec has said that it is looking into formulating a regularisation plan to address its PN17 status, which needs to be submitted to the regulators within 12 months.

The company does seem optimistic. According to Sumatec’s notes accompanying its 2017 financial results, the company expects good prospects for 2018, with production anticipated to go back to normal.

However, it will have to deal with legacy debt issues while moving forward.

“We believe that the company’s balance sheet will be able to absorb the legacy problem.

“With a better future cashflow, a strengthened management and with meaningful and continued support from the main shareholder, the board expects the company to be nearer to being debt-free,” it said.

Meanwhile, the price of crude oil has averaged US$68 per barrel year-to-date.

Maybank Investment Research, in a recent report, says oil price has been ranging from US$63 per barrel to US$75 per barrel – ahead of its average US$65 per barrel estimate for 2018.

“We do not rule out oil price sustaining at current levels, on improving fundamentals, aside from geopolitical supply risk. Global net crude supply is narrowing, while global crude oil inventories are falling and offshore storage is on the downtrend.

“These events have trumped the potential impact of increased shale supply,” the research house says.

According to Sumatec’s website, the Rakushechnoye field is located in Western Kazakhstan, on the Mangyshlak Peninsula, approximately 15km inland from the Caspian Sea and approximately 105km southeast of Aktau, a major regional center.

The field is within close proximity to export infrastructure; 120km to Aktau Port and 60km to main oil and gas pipeline.

“Kazakhstan has the second largest oil reserve and oil production among the former Soviet republics after Russia.

“At 30 billion barrels of proven reserves, Kazakhstan holds 3% of the world’s oil, and is expected to increase further following increasing exploration activity in the country especially in the Caspian Sea,” Sumatec says in a description on its website.

“The oil production of about 1.6 million barrels per day represents an increase of 250% of its production in year 2000. The production is expected to double by year 2020 following the full production of the giant Kashagan and Karachaganak fields.”

It says the relatively low oil consumption of 240 thousand barrels per day allows the country to export 85% of its oil production.

Disclaimer opinion

In a filing with Bursa Malaysia on Monday, Sumatec said its auditors Grant Thornton Malaysia were unable to obtain sufficient audit evidence on the appropriateness of its going concern assumption.

Its auditors pointed out that the group and the company had incurred a net loss of RM113.95mil and RM171.06mil, respectively, in 2017.

The auditors added that the group and the company had also recorded negative cashflows of RM15.33mil and RM9.86mil, respectively, on operating activities during the same period.

Grant Thornton says Sumatec’s ability to continue as a going concern is highly dependent on the timely and successful implementation of a series of proposed corporate exercises pursuant to the proposed acquisition of Markmore Energy (Labuan) Ltd (MELL).

According to Grant Thornton, MELL is a company in which a controlling shareholder and director of Sumatec has interests.

“The proposed acquisition’s objective is to obtain new source of funds to generate adequate cashflow for the development and production activities of O&G in the Rakushechnoye O&G field owned by CaspiOilGas LLP (COG).

“This is in order to achieve profit and positive cashflow from its operating activities, and to settle all major debts and financial obligations. COG is a wholly-owned subsidiary of MELL,” it says.

The auditors also say Sumatec had received an offer from MELL for the development of a condensate extraction plant (CEP), as well as an offer from a contractor for the development and financing of the oil field for up to US$20mil (RM79mil).

“Despite the few development plans of the oil field, we are unable to obtain sufficient appropriate audit evidence in assessing the practicality of the assumptions made by the management in terms of the viability and sustainability of the oilfield’s development plans, and the necessary expenditures which are required for the development and operations of the oil field.

“Furthermore, the funding requirement for the oil field’s development and operations is highly dependent on the timely and successful implementation of the proposed acquisition, the proposed CEP or obtaining financial support from the contractor, which remains highly uncertain as of the date of this report,” Grant Thornton says.

As such, Grant Thornton says it was unable to ascertain whether the proposals would be implemented successfully.

It was also unable to ascertain the financial ability of the contractor to provide sufficient financial support for the operations of the oil field.

Therefore, Grant Thornton says it is unable to determine the effect of profits and positive cashflow which may be generated in future.

Sumatec’s major shareholder Tan Sri Halim Saad ( pic), however, says that the company had been audited by Grant Thornton under the International Financial Reporting Standards (IFRS), which did not incorporate the O&G sector.

He says the company should have instead been audited under the IFRS 6 accounting standard – which is the accounting practice adopted by the O&G industry.

Citing PricewaterhouseCoopers, Halim says IFRS 6 introduced an alternative impairment-testing regime for exploration and evaluation (E&E) assets.

Under IFRS 6, an entity assesses E&E assets for impairment only when there are indicators that impairment exists.

These include rights to explore in an area which has expired or will expire in the near future without renewal; no further planned or budgeted exploration or evaluation; a decision to discontinue E&E in an area because of the absence of commercial reserves; and sufficient data to indicate that the book value will not be fully recovered from future development and production.

“We have a working interest in the (Rakushechnoye) oilfield. In a worst-case scenario, we could still dispose of it for cash,” Halim says.