Cover Story: PNB explains rationale for investing in Sapura Energy and Velesto

This article first appeared in The Edge Malaysia Weekly, on December 3, 2018 - December 09, 2018.
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AFTER the recently approved cash call, Permodalan Nasional Bhd (PNB) will become the largest shareholder in Sapura Energy Bhd. The Edge asked the government-linked investment company for its views on the corporate exercise.

 

The Edge: PNB will now be the single largest shareholder of Sapura Energy with about 40% equity interest. What does this mean for PNB? It is also a major shareholder of Velesto Energy Bhd. Can you explain the rationale for investing in these two large oil and gas companies? In a nutshell, could the funds injected into Sapura Energy have been injected into Velesto instead to beef it up?

PNB: Sapura Energy is already one of the PNB group’s core holdings (defined as companies in which PNB group has a minimum shareholding of 10% or investment with a market value of at least RM1 billion). This position remains the same even though PNB group will own about 40% of the company subsequent to the rights issue.

PNB views the proposed recapitalisation positively due to the following:

1.     It is part of a comprehensive restructuring plan that includes the monetisation of Sapura Energy’s exploration and production (E&P) business and spin-off of its drilling business.

2.     It will reduce Sapura Energy’s debt and the company is expected to emerge with a stronger balance sheet and be well positioned to take advantage of the relatively improved oil and gas industry.

3.     Sapura Energy is one of the few local companies with a strong track record and significant global presence in over 20 countries.

4.     The rights issue price of 30 sen, together with the free warrants, represents an attractive entry price for PNB and all shareholders.

        The circumstances for Velesto are different. PNB inherited its stake in Velesto (formerly UMW Oil & Gas Corp Bhd) through the demerger of UMW Holdings Bhd and UMW Oil & Gas on Oct 25, 2017 and its support of the recapitalisation.

        The companies are in different segments of the oil and gas market, which, notwithstanding the current volatility, still represents an important component of the Malaysian economy and GDP. PNB views its investments in Sapura Energy and Velesto separately based on their unique merits.

 

A Sapura Energy circular to shareholders says the loans that Malayan Banking Bhd (another PNB-controlled entity) has extended to the company are equivalent to 6.2% of the banking group’s net assets. Thus, there is market talk that in taking control of Sapura Energy, PNB is safeguarding Maybank as well. Can you comment?

PNB recognises that one of the major issues with Sapura Energy is the significant debt exposure it has to both domestic and international financial institutions. The company’s strategy to undertake the recapitalisation, together with the strategic partnership of the E&P business with OMV and the proposed partnership for drilling, would comprehensively reduce the debt burden and strengthen the balance sheet of the company, thereby positioning it to take advantage of the oil and gas industry’s recovery.

At the same time, all investment opportunities presented to PNB are evaluated fully based on their own merits. PNB only pursues investment opportunities that meet its stringent investment criteria and objectives. In this instance, PNB believes that the proposed recapitalisation presents PNB and all shareholders of Sapura Energy with the potential of strong returns, given the attractive entry price and position of the company to benefit from the recovery in the oil and gas industry.

 

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