Stake sale of upstream asset likely positive for Sapura Energy
Date: 19.09.2018.

Publication Source: The Edge Markets

Sapura Energy Bhd has entered into a heads of agreement (HoA) with OMV Aktiengesellschaft (OMV AG) for the proposed sale of a 50% stake in its wholly-owned subsidiary, Sapura Upstream Sdn Bhd. The parties have agreed to continue ongoing negotiations on an exclusive basis.

The HoA expresses the intentions of the parties to form a strategic partnership premised on creating sustainable long-term growth, expanding portfolios and future business activities while realising synergies in the value chain. The announcement will also suspend any ongoing listing process for Sapura Upstream pending the completion of the negotiations and definitive agreements.

OMV AG is one of Austria’s largest listed industrial companies with group sales of €20 billion (RM96.31 billion) and a workforce of more than 20,000 employees. In the upstream business, OMV AG has a strong base in Romania and Austria, and a balanced international portfolio, with the North Sea, the Middle East and Africa, and Russia as further core regions. In 2017, its daily production stood at around 348,000 barrels of oil equivalent per day.

We believe the announcement is positive although it is just at the early stage of the HoA, and the deal has yet to be finalised.

The US$1.6 billion (RM6.64 billion) enterprise value mentioned in the announcement is higher than our implied pre-debt discounted cash flow value of RM3 billion — this suggests a potential upside of 19 sen per share to our sum-of-parts-based (SOP-based) TP on a fully diluted basis, if we adjust for the valuation of the upstream segment according to the enterprise value. However, this is subject to final discussion between Sapura Energy and OMV AG.

We believe the sale of Sapura Energy’s 50% stake is a more straightforward option for the group to reduce its debt through asset monetisation compared to the previously mentioned initial public offering listing.

Our SOP-based TP is maintained at 43 sen with our earnings estimates held constant pending further confirmation of the deal. Major shareholders such as Permodalan Nasional Bhd and Kumpulan Wang Persaraan (Diperbadankan) have recently committed to supporting the rights issue subscription, partially allaying the risk of undersubscription of the announced rights issue.

Moreover, the recent retracement in its share price has, in our opinion, sufficiently priced in the potential dilution from the corporate exercise.

We believe the potential sale of a 50% stake in its upstream asset could be a rerating catalyst for the stock, while providing a second option for the company to deleverage. Upgrade to “buy” from “hold” rating.

The risks to our call include delays in negotiations for the sale of its stake in the upstream asset, and a plunge in oil prices. — RHB Research Institute, Sept 12