Sapura Energy takes a step to turn the tide
AS per its restructuring scheme, debt-laden Sapura Energy Bhd is divesting its 50% stake in Sapuraomv Upstream Sdn Bhd, marking an exit from the exploration and production (E&P) business, which was considered a prized asset.
The oil and gas company had indicated last year it was considering the sale of some of its assets, including the divestment of Sapuraomv, to address its unsustainable debt and outstanding payables.
There were reportedly two front-runners and in the end, Sapura Energy agreed to sell its 50% interest to French energy major Totalenergies in a Us$705.3mil or
Rm3.37bil deal. This includes a cash payment of Us$530.3mil and the release of a Us$175mil obligation related to a financing facility.
The other suitor was reportedly Abu Dhabi state fund Mubadala Investment.
In a statement, Sapura Energy group chief executive officer Datuk Mohd Anuar Taib said the exercise marked a “strategic shift away from the E&P business as we enhance our core capabilities to deliver innovative solutions to the dynamic energy industry”.
Analysts say the price was fair on the back of an upcycle in oil price outlook.
“Despite its financial difficulties, Sapura Energy managed to avoid a distressed valuation for Sapuraomv, underpinned by oil price assumption of US$75-US$82.5 a barrel over 2024-2026.
“For comparison, this is only 4% lower than the price Totalenergies is paying to Austria’s OMV for the latter’s 50% stake (in Sapura OMV) for Us$553mil,” says BIMB Securities analyst Azim Faris Ab Rahim in a note to clients.
Totalenergies also inked a deal to buy OMV’S block in February this year and once both transactions are completed, it will become the sole owner of Sapura OMV, whose main assets are a 40% operated interest in Block SK408 and a 30% operated interest in Block SK310.
Both assets are located offshore Sarawak.
The French giant, which already owns interests in two production-sharing contracts in Malaysia to develop a carbon storage project in partnership with Petroliam Nasional Bhd (PETRONAS) and Mitsui, aims to be a top three global liquefied natural gas player.
Notably, Sapura OMV returned to profitability in 2023 after incurring losses that ranged between Rm355mil and Rm451mil in the 2020-2022 period due to sizeable impairments.
Sapura Energy will make a disposal gain of Rm793mil and pare down its loans by Rm2.5bil, which is about 22% of its total borrowings of Rm11bil as at end-january 2024.
It could see yearly cost savings of around Rm100mil from lower finance costs, according to BIMB Securities.
However, the group, which is majority-owned by Permodalan Nasional Bhd, is far from being out of the woods.
“The positive is that the divestment was one of the key conditions of its debt restructuring plan, hence paving the way to address its PN17 status.
“However, Sapura Energy is still saddled with huge debt and investors have become wary of its outlook,” one dealer says.
Azim Faris, for one, believes that Sapura Energy will need to restructure its debt by at least Rm3bil to Rm4bil to achieve a sustainable capital structure.
Another key concern post-disposal exercise is the group’s weakening generation of earnings before interest, taxes, depreciation and amortisation (Ebitda) from its other business, namely engineering and construction, drilling as well as operations and maintenance.
“Monitoring the group’s ex-sapuraomv Ebitda generation is more important and still contains major downside risk,” UOB Kay Hian (UOBKH) Research states in a report where it retained a “sell” on the stock with a two sen target price.
The research firm says its current valuation assumed a minimum Rm2.3bil disposal valuation for Sapuraomv and a Rm1.8bil injection from a white knight.
Based on previous management guidance, UOBKH Research estimates that Sapura Energy needs to generate over Rm200mil Ebitda per quarter to be on track in its reset plans.
However, it only generated Rm54mil Ebitda in the third quarter of financial year 2024 (3Q24), and Rm150mil losses in the 4Q24.
“Sapura Energy is still working on executing its Rm5bil order book and the rig utilisation remains poor, albeit improving, as not all of its tender rig contracts are of high rates or long contract tenures unlike other rig types like jackups.
“At the same time, the group needs to channel investments for energy transition-related projects such as its partnership for a decommissioning-focused unit Kitar Solutions,” adds UOBKH Research.
Despite its exit from E&P, the group still has a presence in the upstream space via SB331 and SB332 production-sharing contracts that were extended to its subsidiary Sapura Energy Ventures in 2019.
According to the research firm, PETRONAS further extended the concessions by another three years to allow the group to complete its minimum work commitments by Nov 19, 2024, failure of which there will be a penalty.
But “we do not know the outstanding contingent liability related to these concessions,” it points out.
In December last year, Sapura Energy got some breathing space when Bursa Malaysia granted a second extension of up to May 31, 2024 to submit its PN17 regularisation plan, which was initially due on Nov 30, 2023.
However, the research firm says that even if the group’s restructuring schemes are successful, public shareholders may have to wait a lot longer as a PN17 upliftment is likely to happen after January 2025 at best.
The divestment of Sapuraomv is expected to be completed by the second half of 2025, subject to relevant approvals. But both parties are committed towards expediting the completion by the end of this year.
Sapura Energy posted a net loss of Rm508.66mil on revenue of Rm4.26bil for the financial year ended Jan 31, 2024. This compared with a net loss of Rm3.16bil on revenue of Rm4.55bil in the preceding financial year.
The stock closed yesterday at 4.5 sen, down by a quarter year-to-date.
At this level, its market cap stood at Rm826.9mil, a far cry from what it was 10 years ago, whereby it was reportedly valued at about Rm30bil before the 2014 oil price crash.