Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on November 12, 2018 - November 18, 2018

WITH Sapura Energy Bhd sealing a strategic partnership with OMV Aktiengesellschaft (OMV) last Friday, the oil and gas services and solutions provider is now eyeing a turnaround in the financial year ending Jan 31, 2020 (FY2020).

This is also pending the success of the RM4 billion cash call Sapura Energy is currently undertaking. Both exercises would pare Sapura Energy’s debt by some RM7 billion, reducing its interest costs by about RM320 million annually, allowing it to focus on its growth prospects.

Sapura’s order book now stands at slightly above RM16 billion across three years, says CEO Tan Sri Shahril Shamsuddin. “Our order book will increase significantly in the coming months,” he says, amid expectations of new contracts from the Middle East, India and South and Central America.

“It is the execution of these works from engineering and construction that will help the company turn around next year,” he tells reporters after sealing the deal for Sapura Energy to divest half of its wholly-owned exploration and production (E&P) unit Sapura Upstream Sdn Bhd to Austrian integrated oil and gas group OMV.

The deal involves a joint venture between Sapura Energy and OMV, following a heads of agreement signed on Sept 12.

Recall that Sapura Upstream’s enterprise value was reported at US$1.6 billion in September. From the tie-up, Sapura Energy will receive proceeds of between US$945 million and US$975 million, representing a gain on disposal of US$619 million to US$649 million.

The deal entails OMV subscribing to 50% of the enlarged issued share capital of Sapura Upstream — to be renamed Sapura OMV Upstream — for US$540 million, with the remaining 50% held by Sapura Energy.

OMV also agrees to repay US$350 million worth of shareholders’ loans owed by Sapura Upstream to Sapura Energy, plus an additional consideration of US$55 million as well as contingency funds of up to US$30 million in relation to Sapura Energy’s Block 30 exploration asset in Mexico.

Minus the funds tied to the Mexican asset, Sapura Energy will have US$890 million cash, of which US$720 million (about RM3 billion) will partly be used to repay its debt. Another US$160 million will be reserved for working capital after excluding about US$10 million 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 its debts by RM7 billion to RM9.88 billion.

On the tie-up, Shahril says: “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.

“The JV, with the injection of new capital and capabilities of a new partner, will probably be bigger and will generate more cash than if Sapura Energy were to do it alone.” The two partners currently share an average cash flow break-even of about US$25 per barrel of oil equivalent (boe).

OMV is an integrated O&G outfit with a footprint in Russia, Europe, the Middle East, Australasia and Africa, with proven reserves of 1.15 billion boe and average daily production of 348,000 boe/d in 2017.

The Austrian outfit will fully consolidate Sapura OMV Upstream’s assets in its financial statements. This comprises 260 million boe in proven and probable reserves and contingent reserves, which will no longer appear in Sapura Energy’s books. Sapura Energy’s Sabah exploration assets are carved out from the strategic partnership OMV deputy chairman Johann Pleininger calls Sapura Upstream’s SK408 fields off Sarawak, which has proven natural gas reserves of nine trillion cubic feet as the JV company’s “most valuable asset”.

He reveals that Sapura Energy came out tops after screening 1,700 assets and 500 companies in OMV’s search for a “partner of choice”.

Referring to SK408, Pleininger says, “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, and then we want to double to up to 70,000 boe/d in just entitlement production by 2023,” he adds.

“So we have a great company, great assets, and a country where we are welcomed and we will invest in. Sapura is a partner of choice.”

In the long run, the JV company is set to become one of the largest Asian independent O&G outfits in terms of reserves that will focus on “where the markets of the future will be” namely Asia Pacific, in particular Southeast Asia, India and China.

“We are committed to stay long term in Malaysia for the coming decades,” says Pleininger. “OMV is cash-rich; it is a cash machine. We hope to also turn Sapura OMV Upstream into a cash machine in the coming years,” he adds.

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

The current share price level, says Shahril, is “very good” for the rights issue. “I think the market is looking at how we are going to bring down our debt …  and now [at post-exercise levels] it is a very, very strong balance sheet.

“And I believe you will see a better valuation closer to its intrinsic value [considering the] cash-generation capabilities in the coming years,” he says.

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