A question of valuation

Sapura Energy to tweak plan for separate listing of E&P division

PETALING JAYA: Integrated oil and gas (O&G) company Sapura Energy Bhd will have to tweak its plan for a separate listing of its exploration and production (E&P) division on Bursa Malaysia after an earlier proposal was shot down by market regulators.

Sources said the company is likely to seek a lower valuation for the unit, and rework the structure for its proposed initial public offering to comply with the chain listing requirements for listed companies.

“The company has not given up on the plan to list the E&P unit on Bursa Malaysia,” a source told StarBiz.

It is believed that Sapura Energy is seeking a valuation of around RM7bil for its E&P division.

But investors’ waning appetite for the stock could curb demand for any new share sale.

Analysts said the downside risks to the stock remained potential impairments, nega- tive earnings surprises, uncertainty over order book replenishment and its weakening cashflow.

Filings with Bursa Malaysia revealed that substantial shareholder, the Employees Provident Fund, had almost halved its stake in Sapura Energy over the past three months from around 11.5% in December to 6.5% last week.

The relentless selling pressure pushed the stock down to a low of 45 sen yesterday, while its market value plunged to RM2.7bil.

The company, sources said, is banking on the spinoff to boost its financial health.

Sapura Energy, they said, has an order book of about RM18bil, including recent wins totalling RM905mil. This is enough to sustain the group for the next three years.

However, the group is also struggling with more than RM15bil in debts.

“A pick-up in spending by oil majors, along with rising crude oil prices, will benefit the company,” a source said.

Sapura Energy had in January confirmed a report that first appeared in StarBiz Premium that it had engaged advisers to evaluate a plan to demerge its E&P unit.

But the company’s plan to list its unit on Bursa Malaysia appeared to hit a regulatory roadblock amid concerns that it may not meet the chain listing requirements and the unit’s lack of a profit track record.

Chain listing is a term used by the Securities Commission (SC) to describe a situation where a subsidiary of a listed company is seeking a listing on its own.

To qualify for this, the subsidiary should have a distinct and viable business of its own and must not be in conflict or competition with the parent company.

It also has to demonstrate that it is a standalone unit in terms of operations, purchases and finances.

The unit to be listed must also show that it can generate strong cash flow to sustain its working capital requirements, according to the listing regulations.

Sapura Energy is an integrated O&G compa- ny with exposure to the engineering and construction and drilling divisions, besides E&P.

The E&P segment comprises of the upstream O&G production business.

It is effectively anchored by Sapura Energy’s purchase of Newfield Malaysia Holding Inc, a company that has eight production sharing contracts to drill oil offshore Malaysia.

Sapura Energy purchased Newfield for US$898mil in February 2014, when the price of crude oil was above US$100 per barrel.

Four months later, the price of crude oil collapsed.

But a recovery in the price of crude oil in the international market to above US$60 a barrel has helped the unit show a profit.

MIDF Research, in a recent report, commented that this was the only stable segment within the group.

The group’s latest nine-month results to end-October showed that revenue from the business was up 5.7% from a year ago, while cumulative segment profit before tax for the E&P segment was sustained at above RM50mil.