This article first appeared in The Edge Financial Daily on September 13, 2018

KUALA LUMPUR: Instead of going through the tedious process and encountering uncertainties to list its upstream unit, Sapura Energy Bhd has clinched a deal to sell a 50% stake in its exploration and production (E&P) unit for possibly US$800 million (RM3.32 billion) cash.

The stake sale will help to monetise its upstream assets that are housed under Sapura Upstream Sdn Bhd. On top of that Sapura Upstream will see a strong shareholder, OMV Aktiengesellschaft (OMV AG) — an Austrian-listed oil and gas (O&G) group with a market capitalisation of €14.9 billion (RM71.90 billion).

Shortly after the morning opening bell yesterday, Sapura Energy announced to Bursa Malaysia that it entered into a heads of agreement (HoA) for the proposed sale of a 50% stake in its wholly-owned E&P outfit, Sapura Upstream to OMV AG.

The valuation of its upstream unit is based on an enterprise value of US$1.6 billion (RM6.64 billion) compared with Sapura Energy’s market capitalisation of RM2.13 billion.

Both parties would continue the ongoing negotiations to iron out the details on an exclusive basis, according to the announcement.

The announcement seems to be pretty well received by the market, a rather sharp contrast to its massive cash call which had also caught many by surprise. Sapura Energy’s share price headed higher yesterday, up two sen or nearly 6% to close at 35.5 sen. The counter was the most actively traded counter as well, having 134.89 million shares traded.

Analysts say that the stake sale provides certainty on the group’s monetisation plan, which helps to address Sapura Energy’s cash requirements in the near term. Furthermore, Sapura Energy will join forces with OMV AG to grow the upstream business.

For upstream O&G business, OMV AG has presence in Romania, Austria, the North Sea, the Middle East, Africa and Russia.

OMV AG’s 2017 daily production stood at approximately 348,000 barrels of oil equivalent per day (boepd), which it expects to accelerate to 600,000 boepd.

Sapura Energy said the partnership will be strategically positioned to create “sustainable” long-term growth, expand portfolios and future business activities as well as realise synergies in the value chain.

The group’s president and chief executive officer Tan Sri Shahril Shamsuddin said the partnership with OMV AG complements Sapura Energy’s strategy to grow its portfolio and expand its acreage position.

“OMV AG’s existing footprint offers new opportunities for our upstream segment and increases market reach for our services segment where OMV operates,” he said.

“We have explored all options including the potential listing of our upstream business. The invitation to enter into this strategic partnership with a leading oil and gas player serves our goals and aspirations better while providing certainty in timing and valuation,” he added

In a note to investors yesterday, RHB Research analyst Lim Sin Kiat upgraded the rating for Sapura Energy to a “buy” call (from a “hold” call) with unchanged target price (TP) of 43 sen, as the announced enterprise value is higher than his implied pre-debt discounted cash flow value of RM3 billion for Sapura Upstream.

“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,” he said, adding that the 50% stake divestment in Sapura Upstream is a more straightforward option compared with the initial public offering.

Meanwhile, UOB Kay Hian analyst Kong Ho Meng also upgraded the stock to a “hold” call from a “sell” yesterday, with a higher TP of 31 sen, commenting that the divestment indicated that Sapura Energy’s RM4 billion rights issue of Islamic convertible preference shares (ICPS) and new ordinary shares are not the only option to repay debt.

“With the early timing of the strategic partnership, it also gives rise to a possibility that the rights issue exercise is no longer the group’s last resort to repay its debts, which was a previous concern for investors,” he noted.

Nevertheless, some in the investing fraternity still have a “wait-and-see” view on Sapura Energy considering its RM4 billion cash call that involves rights issue of ICPS and new ordinary shares, which is sweetened by free detachable warrant.

Analysts concur that Sapura Energy has made efforts to clean up its balance sheet. The next crucial thing that they want to see is the group’s earnings visibility before they turn bullish on the stock.

“In the short term Sapura Energy is positive because it has the news flow, like divestment and interest saving, but their next few quarterly results [core profits] may not be that fantastic [based on the current order book], so for investors who want to buy the shares now, they have to wait a very long term to see recovery,” said an analyst who declined to be named.