Publication Source: The Malaysian Reserve

Sapura Energy Bhd’s recent de-gearing exercises are perceived as a net positive for the company, but its shares will remain under pressure until the integrated oil and gas (O&G) group returns to profitability.

The company completed its RM4 billion rights issue last week after 9.99 billion new shares, 998.69 million warrants and 2.4 billion Islamic redeemable convertible preference shares were listed on the Main
Market.

Shareholders’ approval was also obtained in the same week to grant OMV Aktiengesellschaft (OMV AG) a 50% stake in the company’s exploration and production unit, Sapura Upstream Sdn Bhd, via the issuance of new shares in holding company SEB Upstream Sdn Bhd.

The exercise will result in Sapura Energy gaining RM4.06 billion in cash proceeds from OMV AG and, along with the proceeds from the rights issue, will predominantly be used to repay its outstanding RM17.21 billion debt.

Maybank Investment Bank Research analyst Liaw Thong Jung said both exercises facilitate the de-gearing of Sapura Energy and would put the company in a better financial position going forward.

“The completed rights issue and soon-to-be-completed sale of a 50% stake in its energy asset are timely and (these are) important exercises to turn the company around.

“With a sizeable orderbook at hand, the company should be able to turn in an improved financial performance in the next two quarters,” he told The Malaysian Reserve (TMR) recently.

He added that the 50-50 joint venture (JV) with OMV AG would allow Sapura Energy to leverage on a credible partner in the industry, while the asset itself is expected to register higher production rates this year.

The asset should reach peak production in two to three years’ time, Liaw said.

Meanwhile, an industry source told TMR that the move is a net positive for Sapura Energy as it will improve the company’s balance sheet with the funds generated to be used to repay bank loans.

“The interest saved from the borrowings will make up for the loss of proceeds from the 50% sale of its energy business,” the source said.

Sapura Upstream commenced production of its B15 natural gas field within block SK310 in October 2017 and is expected to begin production from the Sarawak-based SK408 block later this year.

The upstream unit also undertook 11 explorations of wells in block SK408 over the past four years, making nine natural gas discoveries of which six are commercial. Two of the larger fields in the block have over a trillion cu ft in net proved and probable reserves.

Investors remain wary as the company continues to struggle in the red, raking up a net loss of RM292.88 million over the first nine months of its fiscal year ended Jan 31, 2019.

The company’s rights issue was also undersubscribed due to lack of demand amid uncertainties within the O&G industry, causing the company’s shares to test record lows last week.

“The undersubscription of the rights issue is weighing on the company’s shares as the underwriting banks had to take up the unsubscribed shares. This is expected to take a few months to sort out.

“Sapura Energy needs to demonstrate that they can generate profit before we see its shares recover. This will take over a year due to the overhang of its large share base which will keep the company’s price-to-earnings ratio unattractive for a while,” the source said.

In the meantime, Liaw opined that investors will believe in the fundamentals of Sapura Energy again when the company improves at the operational level.

“Investors have mostly been on the sidelines recently, causing the company’s shares to trade sideways,” he said.

Sapura Energy is currently sitting on a RM18.6 billion orderbook and expects the aforementioned de-gearing exercises to strengthen the group’s liquidity and cash position for future growth.