Sapura Energy strikes a good cash deal
Date: 25.09.2018.

Publication Source: The Edge Markets

PRESIDENT and CEO of Sapura Energy Bhd Tan Sri Shahril Shamsuddin was visibly pleased when The Edge met him last week. His enthusiasm is understandable.

The oil and gas services provider, in which Shahril has 16.8% equity interest, had just announced that Austrian oil and gas giant OMV Aktiengesellschaft was seeking to acquire a 50% stake in the group’s upstream assets housed under Sapura Upstream Sdn Bhd (previously known as Sapura Exploration and Production Sdn Bhd).

The parties have signed a heads of agreement and are ironing out the details.

The pricing of the stake is based on an enterprise value of US$1.6 billion (RM6.64 billion), which means Sapura Energy will soon have US$800 million fresh cash — something that the group needs to deleverage its debt-heavy balance sheet.

On top of that, Sapura Energy will have a strong partner to grow its upstream business.

The enterprise value of Sapura Upstream is a stark contrast to Sapura Energy’s market capitalisation of RM2.6 billion.

Sapura Energy’s share price saw a strong rebound after the announcement. During the three trading days last week, the stock gained 30% to close at 45.5 sen on Friday. A total of 1.12 billion shares changed hands during the holiday-shortened week.

The climb in share price spells investor confidence in the deal, considering that the counter had been hammered down to an all-time low of 33.5 sen right after the announcement of its massive RM4 billion cash call last month.

“It’s a good deal … I can challenge anyone who says otherwise,” Shahril tells The Edge. “It gives validity and is an endorsement of the company (Sapura Energy) …  equal shareholding to a company that has a market capitalisation of €15 billion.”

While Shahril is tight-lipped on the salient features of the agreement, The Edge understands that Sapura Energy may manage the joint venture.

He adds that Sapura Energy will be able to leverage OMV and vice versa, and that Sapura will have a presence in OMV’s strongholds. “There are also some aspects you can’t put a price tag on, such as knowledge, expertise, market reach and training. There is a wealth of knowledge and human resources that we can tap in our new partner,” he says.

In a press release, OMV chairman and CEO Rainer Seele says, “The intended partnership with Sapura Energy is a major step to develop OMV’s activities in Southeast Asia. The oil and gas demand in this region is expected to increase strongly until 2030 and OMV is taking the opportunity to further expand the business and build up the new core region.”

The stake sale will defer Sapura Energy’s plan to list its upstream assets that was slated for later this year.

“It [the stake sale] has more value add than an IPO. I see this as forming a partnership instead of just a divestment,” says Shahril, noting that there will be uncertainties along the listing process that range from valuation and tedious compliance to market sentiment and investor appetite.

Who is OMV?

The name might not ring a bell in Malaysia but the oil and gas giant has a strong presence in Eastern Europe with a daily production of 348,000 barrels of oil equivalent (BOE) per day, which is evenly split between oil and gas, with more than half of the production coming from Romania and Austria. OMV has a workforce of 20,721.

For its financial year ended Dec 31, 2017, OMV chalked up €1.59 billion in net profit (RM7.66 billion) from €20.22 billion (RM97.37 billion) in revenue. Last Thursday, its shares closed at €45.92 (RM221.37), giving it a market capitalisation of €15.02 billion (RM72.33 billion).

OMV’s upstream arm explores and produces oil and gas in Central and Eastern Europe, the North Sea, the Middle East, Africa, Russia and Australasia.

As at end-2017, OMV had proven reserves of 1.15 billion BOE and proven and probable reserves of 1.94 billion BOE. Its downstream business includes three refineries in Austria, Germany and Romania, an international multi-brand filling station retail network and a processing capacity of 17.8 million tonnes. OMV also has an Austrian gas pipeline network and storage facilities.

Its largest shareholders are Österreichische Bundes- und Industriebeteiligungen GmbH, which represents the Austrian government and holds a 31.5% stake, and International Petroleum Investment Company, which has 24.9%.

Analysts’ take

The deal came as  a surprise to the investing fraternity but thus far, most analysts and fund managers seem positive about it simply because the stake sale gives much more assurance on Sapura Energy’s plan to monetise assets to pare down its debt, compared with a listing exercise.

“The divestment has fewer uncertainties compared with a listing exercise. Investors never like uncertainties,” says an analyst who tracks the stock.

Sapura Energy is expected to book a gain of as much as RM2 billion, if not more, which will boost its bottom line but not its core profit.

Apart from settling borrowings with the cash proceeds, Sapura Energy expects to transfer debts associated with the upstream assets to the company jointly-owned with OMV.

As at end-April, Sapura Energy had cash of RM1.36 billion, long-term debt of RM10.90 billion and short-term borrowing of RM5.57 billion.

Sapura Energy’s finance cost for the first three months of its financial year ended April was RM227.93 million. The company saw a net loss of RM136.73 million from RM1.05 billion in revenue.

In a report, UBS says, “Based on the deal’s enterprise value, we estimate Sapura Energy could receive US$800 million or RM3.2 billion in cash. This should remove near-term financing concerns as it would allow Sapura Energy to repay its RM3.8 billion debt due in 2019, without relying on cash inflow from capital raising.”

UBS has a “buy” call on Sapura Energy and a 12-month target price of 52 sen, which is almost a 17% premium to the closing price of 44.5 sen last Thursday.

To recap, Sapura Energy announced a RM4 billion cash call involving a rights issue of Islamic convertible preference shares and new ordinary shares sweetened by free detachable warrants to pare down borrowings recently.

UBS adds, “We believe the successful rights issuance will be key to removing the financing overhang for Sapura Energy.”

Public Investment Bank expects Sapura Energy’s net gearing to drop to 0.7 times with total interest cost saving of about RM350 million. “As a result, the group’s bottom line for FY2020/FY2021 is expected to improve by more than 100% to about RM280.2 million and RM524.1 million respectively.” It has a “trading buy” call and target price of 81 sen on the stock.

Interest cost saving will free up more cash for working capital, which is essential for the group to execute jobs and secure new contracts.

Going forward

To an oil and gas man like Shahril, the deal that is expected to bring in over RM3 billion cash is akin to striking oil in a new well.

Sapura Energy has put in place two major plans to slash its debt —divesting a 50% stake in an upstream unit and a rights issue — in a short span of four weeks. Should things pan out, its debt problem will soon be a thing of the past.

In fact, Shahril is already looking beyond the concerns about the group’s large borrowings. “My work is not done yet. I have a different set of challenges now [after the group has addressed the debt problem],” Shahril says, noting that he needs to make sure Sapura Energy wins new jobs.

Sapura Energy’s order book is gaining traction at RM16.7 billion, after a three-year low of RM14.9 billion early this year.

According to CGS-CIMB, in Saudi Arabia, Sapura Energy is one of two or three contractors bidding for work at Saudi Aramco’s Marjan field. Sapura Energy is also bidding for US$950 million of contracts at ExxonMobil’s Neptune field offshore Romania.

It is also the leading bidder for the installation of the early production platform at the Mizton field, offshore Mexico, for Eni, and a strong contender for platform fabrication and installation work at ONGC’s KG-DWN-98/2 project in India.

The steady climb in crude oil prices, which has breached the US$70 level, might be a signal that the industry will be out of the woods soon, if it is not already.

The stage seems set for Shahril, one of the most highly paid CEOs on Bursa Malaysia, to prove that his strategy to expand the group via borrowings can bring it to greater heights.