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Thursday, May 12, 2022

Another way out for Sapura Energy worth scrutinising

 

For many, another rescue plan for Sapura Energy Bhd (SEB) is outrageous. It reported an RM8.9 billion loss in the financial year ended Jan 31, 2022, the worst in Malaysian corporate history. The company is now deeply in debt.

For stakeholders such as Permodalan Nasional Bhd (PNB), a bailout would just mean getting deeper into the quagmire. For the record, PNB holds an almost 40% stake in SEB, making it the single largest shareholder.

But for the nation, it could end up being another government rescue plan on a list of bailouts that have failed. For many, it should not even be on the table.

In fact for some parties that themselves do not have a direct stake in SEB and therefore the company’s fortunes, there is a Plan B – a private sector-led bailout. But the corporate world is never known for its altruism. Like vultures, they will pick at the meaty parts, eventually leaving an empty shell. Institutions and stakeholders with interests in SEB will get almost nothing back. Lenders will likely take a big haircut.

Perhaps there is also a Plan C, one that has the potential to get SEB back on its feet without the removal and outright sale of any of its assets. This is a strategy that SEB has already used once with commendable results.

In 2019, SEB divested 50% of its E&P (exploration and production) business to OMV, an Austrian oil, gas and petrochemical player, for US$890 million. The deal not only ensured that the E&P business remained in the SEB stable, but also gave the company a huge financial gain.

Over and above that, OMV brought in a new level of expertise that has proven beneficial for the partnership.

By the time the deal was struck, the E&P business was already valued at US$1.6 billion, up 79% from the US$895.5 million that SapuraKencana Petroleum (the precursor to SEB) paid Newfield International Holdings Inc for all its interests in Malaysia.

In 2019, the probable and proven reserves stood at 92 mmboe (million barrels of oil equivalent), up from 36 in 2014 when the Newfield deal was struck. It was a 156% increase. However, the Brent price had slid down to US$79 per barrel from a high of US$107 in 2014, representing a 26% drop, but that was a temporary setback.

The benefits of the deal is there for all to see now. Apart from the immediate financial gains and addition of new expertise from the 2019 deal, SEB still retains half of the E&P business.

Since then, with the additional discovery in New Zealand and development of the Jerun field, the probable and proven reserves should have risen further. A conservative estimate would put it at about 150 mmboe.

The Brent price has risen above the US$100-per-barrel mark again and is expected to continue on an upward trend as the Ukraine crisis persists. With that in mind, coupled with the production of Jerun which is expected to commence in 2024, the operating profits of the E&P business have been projected to reach close to RM1 billion in the next five years.

Similar partnerships for the other businesses in the SEB stable, such as drilling as well as E&C (engineering and construction) may just be the way to go.

The benefits are obvious. It will consolidate these businesses between SEB and its individual partners within the SEB stable. It will prevent asset stripping, which would otherwise only create more competition.

Selling off parts of the whole to bargain hunters will also not ensure that SEB realises its full value. Lastly, the proceeds from such tie-ups can be used to not just reduce its debts but also serve as working capital.

There are no winners in the SEB saga. Every stakeholder has lost almost everything they have invested in the company, be it the lenders, PNB or the Sapura Group.

It is only in their interest to take a look at this third option. This, alone, makes it a consideration worth contemplating. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.

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