Sapura seals deal to divest 50% upstream unit to OMV AG for up to US$975m

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KUALA LUMPUR (Nov 9): Sapura Energy Bhd has sealed the deal to divest half of its wholly-owned exploration and production (E&P) unit Sapura Upstream Sdn Bhd to Austrian oil and gas (O&G) outfit OMV Aktiengesellschaft (OMV), of which part of the proceeds will be used to repay its debt.

Sapura and OMV inked a joint venture (JV) agreement for the strategic partnership today, as a follow-up to a Heads of Agreement (HoA) signed between the two parties on Sept 12.

The deal entails OMV subscribing to 50% of the enlarged issued share capital of Sapura Upstream for US$540 million, and to repay US$350 million worth of shareholders’ loan owed by Sapura Upstream to Sapura Energy.

This marks a cash consideration of US$890 million to Sapura Energy, of which US$720 million (RM3 billion) will partly be used to repay its debt. Another US$160 million will be reserved for working capital after discarding funds required for the exercise.

Sapura Energy has long- and short-term borrowings of RM11.12 billion and RM5.76 billion respectively as at end-July. On top of Sapura Energy’s recent RM4 billion rights issue, the company will be able to pare about RM7 billion in debt to RM9.88 billion.

OMV also agreed for an additional consideration worth US$55 million plus up to another US$30 million in contingency funds mainly linked to the resource volume in Block 30, Mexico at the time of taking the final investment decision.

In total, Sapura Energy would receive minimum cash proceeds of between US$920 million and US$975 million, with a gain of disposal of approximately US$649 million, said the company.

Under the agreement, OMV will fully consolidate the JV company’s assets in its financial statements, which comprises 260 million barrels of oil equivalent (boe) in proven and probable (2P) and contingent (2C) reserves, which will no longer appear in Sapura Energy's books.

It should be noted that Sapura Energy’s Sabah exploration assets is carved out from the strategic partnership.

In explaining the management structure of the newly-formed JV company Sapura OMV Upstream, Sapura Energy founder, president and group chief executive officer (CEO) Tan Sri Shahril Shamsuddin said he will be there as the chairman.

The CEO will also come from Sapura Energy, Shahril said. Meanwhile, the chief operations officer will be jointly appointed by Sapura Energy and OMV, while OMV will be appointing its chief financial officer.

“The union of these two companies brings about very good processes, capital, and enhances the technology that exists in both companies,” said Sharil.

“We have done this deal in a very short time...we realised in the early stages of the discussion that we were aligned in what we wanted to do with our companies and what we wanted to do in the region.

“This facilitated the progress and the rapid conclusion of this JV. We could not have got from a listing [of Sapura Upstream] neither the price [offered by OMV] nor the [prospects of] development of the companies and the human capital involved,” he added.

The vision, said Shahril, is for the JV company to become one of the largest Asian independent O&G outfits, adding that the exercise would also contribute to Sapura Energy’s vision to turn around by its financial year ending Jan 31, 2020 (FY20).

OMV is an integrated O&G outfit with footprints in Russia, Europe, the Middle East, Australia and New Zealand, with proven reserves of 1.15 billion barrels of oil equivalent and average daily production of 348,000 boe/d in 2017.

OMV AG deputy chairman Johann Pleininger said that the plan is to first invest in Malaysia before going to other countries in "growth areas" of the O&G industry as part of its Asian expansion strategy.

“We want to replicate our success story in OMV in recent years here in Malaysia together with Sapura Energy. We will give priority to Malaysia, we are committed to stay long-term for the upcoming decades.

It should be noted that Sapura Energy’s Sabah exploration assets is carved out from the strategic partnership. Despite that, among the assets that piques OMV’s interests include Sapura Upstream’s two natural gas E&P blocks in its SK408 fields offshore Sarawak which has proven reserves of 9 trillion cubic feet (Tcf) of natural gas.

“Already right now, [the JV] has a great portfolio that is fit for growth. So what we are aiming for is to triple the production in the next two years from close to 10,000 boe/d currently to 30,000 boe/d in 2020,” said Pleininger.

“And then we want to double to up to 70,000 boe per day in just entitlement production by 2023. OMV is cash-rich, it is a cash machine. We hope to also turn Sapura OMV Upstream into a cash machine in the upcoming years,” he added.

Shares of Sapura Energy rose 1.5 sen or 4.17% to close at 38 sen today, giving the group a market capitalisation of RM2.25 billion.