• Reiterate SELL and MYR0.02 TP, 56% downside. We are mildly positive on this disposal exercise as it is essential to reset Sapura Energy and strengthen its balance sheet while marking the group’s exit from the E&P business. The implied EV/2P price tag of USD5.20/boe, in our view, is reasonable. We maintain our call, as SAPE’s holistic debt and equity restructuring – highly dilutive, in our view – is inevitable for it to sail out of the storm.

• Disposal of 50% stake in SapuraOMV. SAPE has proposed to divest a 50% equity stake in SapuraOMV to TotalEnergies. In return, it will receive a gross cash consideration of USD530.3m and release of a USD175m obligation in respect of a financing facility extended by OMV Exploration & Production (OMV E&P) to SapuraOMV. The transaction is expected to be completed by 2HCY25 – subject to relevant approvals – but both parties are committed towards expediting the completion by the end of this year.

• We are mildly positive on this disposal exercise, as it is essential to reset SAPE and strengthen its balance sheet while marking the group’s exit from the E&P business. The estimated net disposal proceeds of USD514.1m (MYR2.5bn) will be utilised mainly to settle amounts owed to SAPE’s relevant scheme creditors, including its multi-currency financing lenders. This represents c.22% of total borrowings of MYR11bn as of end FY24 (Jan). Recall: OMV E&P is also disposing its 50% stake in SapuraOMV to TotalEnergies for a total cash consideration of USD903m, including the full repayment of the outstanding USD350m shareholder loans granted by OMV E&P to SapuraOMV. Stripping that off, SAPE’s cash consideration is c.4% lower than OMV E&P’s deal. Despite the implied EV/2P price tag of USD5.20/boe being lower than Hibiscus Petroleum’s (HIBI MK, NR) last trade of c.USD6.30/boe, we deem it reasonable, as the deal was concluded when oil prices were lower. Meanwhile, the proposed divestment is expected to lock in a net gain on disposal of c.MYR793m upon completion.

• We maintain our earnings estimates pending completion of this exercise. Note: SapuraOMV had been in losses – ranging between MYR355m and MYR451m in 2020-2022 – largely dragged by sizeable impairments. It managed to post a turnaround with a minimal MYR9m profit in 2023. Our SOP-based TP is largely unchanged at MYR0.02 after adjusting for the SapuraOMV sale, capital injection from potential white knight, and inclusive of a 10% ESG discount based on SAPE’s 2.5 ESG score vis-à-vis the 3.0 country median. We have also assumed that 25% of total debt will be converted to equity based on a conversion price of MYR0.10/share. Our share base is enlarged by 26.8bn or 1.5x. Upside risks: Better-than-expected project execution and stronger-than-expected contract flows. 

Source: RHB Research - 23 Apr 2024