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This article first appeared in The Edge Financial Daily on October 15, 2018

KUALA LUMPUR: The latest slide in Sapura Energy Bhd’s share price may have brought it to a comfortable level for long-term investors seeking a growth story in the oil and gas (O&G) sector.

The counter fell to record lows of under 40 sen per share this month, dragged by another negative swing in investor sentiment across the equity market.

Those who bought Sapura shares at the start of the year would have lost near 50% of investment. But at the current level, its RM4 billion cash call is now more appealing, especially for new investors that are coming in.

To recap, Sapura proposed a five-for-three rights issue at 30 sen apiece, together with one warrant for every 10 rights shares subscribed.

Sapura will have the undertaking of its 12.6%-shareholder Permodalan Nasional Bhd (PNB), as well as Maybank Investment Bank and Credit Suisse to subscribe to excess rights shares not taken up.

PNB also agreed to subscribe in full Sapura’s RM1 billion Islamic redeemable convertible preference shares (RCPS-i) offering which entails a one-for-one conversion. Analysts opined that Sapura intends to fully redeem the instrument before its maturity to avoid further share dilution.

At its last closing share price of 36 sen, an investor could buy 3,000 Sapura shares for RM1,080 and subscribe to 5,000 rights shares at RM1,500 for an overall investment cost of RM2,580 for 8,000 shares or 32.25 sen per share.

If the existing shares are acquired at 40 sen, the total investment including rights subscription would cost 33.75 sen apiece. At 50 sen per share, that cost would rise to 37.5 sen.

If entered at 60 sen per share — which was the last closing share price before Sapura announced the cash call — that would make up a total investment cost of 41.25 sen per share.

In comparison, Sapura’s five-year RCPS-i costs 41 sen apiece. The free rights warrants, meanwhile, are convertible for 49 sen apiece with a maturity period of seven years.

Bloomberg data showed that the target price (TP) for Sapura shares published by 13 analysts since the start of October had varied from a low of 32 sen to a high of RM1.01.

The lower TP range had not priced in the proposed partnership between Sapura and Austrian O&G outfit OMV AG, with one analyst citing lack of details before a firm agreement is announced.

The two entered into a heads of agreement in September, where Sapura will sell 50% of its exploration and production (E&P) unit Sapura Upstream Sdn Bhd to OMV for an estimated RM3 billion.

Proceeds from Sapura’s corporate exercises could be used to pare down its massive debt by up to RM7 billion, reducing financing costs by about RM350 million annually and putting the group in a better position to benefit from the recovery of the sector.

CGSCIMB Research analyst Raymond Yap, in a note dated Aug 27, advised investors to “accumulate now and buy even more on dips”. Sapura shares were trading at 42 sen at the time. Yap’s TP is currently set at 76 sen.

“Of course it looks attractive,” said another analyst who spoke on condition of anonymity. “But it depends on the speed of the recovery of the sector. It also depends on how soon management is able to turn the company around.”

There is one concern: Sapura underlined a slower-than-expected earnings recovery in the last quarter. Following the corporate exercises, a large earnings dilution looms in the near term.

The carved-out E&P operation is its only lucrative business at the present, while the rights issue with warrants could increase its share base to around 2.8 times its current size.

In its defence, Sapura has a massive order book of over RM16 billion which, as mentioned by its president and chief executive officer (CEO) Tan Sri Shahril Shamsuddin, is “mainly in the E&C (engineering and construction) segment”.

Out of the sizeable order book, around RM9 billion is expected to be recognised throughout the financial year ending Jan 31, 2019 (FY19) and FY20, MIDF Research analyst Aaron Tan said in a note in September.

The tie-up with OMV will also further open up Sapura’s market reach of its E&P business to Romania and other parts of Europe.

But while there is a lot of excitement amid a faster-than-expected recovery in oil prices this year, its direction moving forward seems to be anyone’s guess.

Back in August, Petronas president and CEO Tan Sri Wan Zulkiflee Wan Ariffin said the company was expecting Brent crude to average under US$73 (RM302.95) per barrel this year, but laid out a conservative forecast of US$50s-US$60s for 2019.

Sapura expected the rights issue to be completed before year-end. Until then, its share price would likely be suppressed at the current level, giving existing and new investors some time to decide whether to answer its call.

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