Sapura Energy (SAPE) finalised its divestment deal structure last Friday with regards to its upstream assets to OMV. This deal would see the set-up of a JV company, valuing it at an enterprise value of US$1.6bn, which is in line with our existing forecast. Post deal, SAPE will receive up to US$975m which will mostly be utilised to pare down the current RM16.9bn group debt. With earnings looking bottomed, rights issue and divestment exercises expected to be completed by 1Q19, we upgrade SAPE to a HOLD with higher target price at RM0.35 (from RM0.32) as downside risk looks limited from current level.

The Deal Structure

SAPE completed the signing with OMV to divest 50% of its upstream assets, for total proceeds of US$890m (additional US$85m subject to consideration to be satisfied). Out of the US$890m, SAPE will utilise US$720m (~80%) to repay its existing debt. The upstream assets will be injected into a new JV company which will be equally owned by SAPE and its new partner, OMV. The deal is expected to be completed by 1QCY19, and will see a one-off disposal gain of US$649m.

Leverage on OMV Regional Experience and Capabilities

OMV is one of Austria’s largest listed industrial companies with market capitalisation of EUR$16bn. The O&G assets exposure are mostly in Romania and Black Sea, Austria, North Sea, Australasia, Russia, Middle East and Africa. OMV’s assets portfolio currently produced 348kbpd in 2017 (>50% of Petronas production) with proven reserves of 1.15bn barrel.

Raised Forecasts on Interest Savings

We raise our FY20-21E earnings forecast by 36% and 42% to reflect the interest cost savings from the expected US$720m debt repayment post divestment. We are keeping our annual production assumptions unchanged despite JV new target guidance of tripling existing production to 60-70kbpd (translating to 11.1-12.7m annual gross production) by 2023 with a US$500m planned capex programme over the next 5 years.

Upgrade to HOLD with higher target price

We Raised SAPE’s Target Price to RM0.35 (from RM0.32) and Upgrade to HOLD on better clarity as earnings appear to have bottomed, and share price has mostly reacted to the negative dilutive impact of the RM4bn rights issue. In addition, this divestment to OMV will help settle part of its massive debt and reduce net gearing level to 0.6x, which we view positively.

Risks to Call

Key upside risks include (i) higher contract wins than we expect, a better rig utilisation rate, and a stronger US$. Downside risks include further delay in existing work orders, weaker drilling rig utilisation.

Source: Affin Hwang Research - 12 Nov 2018