Sapura Energy’s rights issue to create value for shareholders
Date: 5.09.2018.

Publication Source: The Edge Markets

Sapura Energy Bhd’s plan to raise RM4 billion, via a major rights issue, will create value for shareholders and return the company to profitability as oil and gas market prospects improve, said Credit Suisse in a report dated last Friday.

“ We would look to proceed with the rights issue exercise as we expect Sapura Energy to create value rather than destroy it, moving forward, as prospects in the sector continue to improve,” it added while maintaining its outperform recommendation on Sapura Energy shares.

Sapura Energy share price fell last Friday in a knee jerk reaction to the rights issue announcement.

“While this highly dilutive exercise might seem negative on the surface, we believe it is necessary and will place Sapura Energy in a much better position to secure new higher-quality contracts (demand for services is clearly on an uptrend) in the sector’s upcycle. “ it added.

“We believe longer term shareholders will be rewarded as Sapura Energy monetises its exploration and production (E&P) assets and secures more new profitable contracts,” it said.

Sapura Energy announced last Friday that it planned to raise RM4 billion through a rights issue.

Credit Suisse said under the exercise the number of company shares would increase from 5.99 billion to 15.98 billion shares, with room to expand further to 19.37 billion shares when both the redeemable convertible preference shares in SEB (RCPS-i) and free warrants are fully converted.

The company plans to use the funds raised to boost its financial position and reduce its estimated RM16 billion debt to banks.

It is also evaluating other options which may involve the listing of its oil and gas business and a possible strategic partnership in its drilling business.

Existing major shareholder, Permodalan Nasional Bhd (PNB), which collectively holds about 12% of Sapura Energy, would subscribe in full its entitlement and has also given an undertaking to mop up excess shares that are not taken up to an amount to be agreed on later.

Credit Suisse said: “More importantly, if Sapura Energy successfully raises RM4 billion, it would save RM184 million per annum in interest. Therefore, the company will likely return to the black in FY20E (estimate, even if it does not win any new contracts.

“This move will keep its bankers happy and would help boost Sapura Energy’s bankability in the future “it said.

Credit Suisse also said it believed PNB’s participation in the rights issue exercise could be a prelude to more cooperation between PNB’s drilling arm (Velesto Energy) and Sapura Energy in the future.

Velesto could leverage on Sapura Energy’s global footprint to revive its ailing business outlook.

“While the quantum of funds to be raised is sufficient to keep leverage ratios at a comfortable level for any organic expansion, Sapura Energy intends to further strengthen its balance sheet to address larger volume of work,” it added.