This article first appeared in The Edge Financial Daily on November 30, 2018 - December 6, 2018

KUALA LUMPUR: After its recent proposal to sell off half of its profitable exploration and production (E&P) segment to a foreign firm, Sapura Energy Bhd has now set its sights on a deal for its loss-making offshore drilling business.

President and group chief executive officer (CEO) Tan Sri Shahril Shamsuddin confirmed yesterday that the integrated oil and gas (O&G) group has been approached by at least one company to participate in its drilling business.

“Actually it is quite similar [to the E&P deal, whereby] it is the other company that’s seeking us,” said Shahril at a press conference after the group’s extraordinary general meeting (EGM).

Sapura Energy is also in talks with several other players on the matter, said Shahril, although nothing has been set in stone at this point.

Drilling is one of Sapura Energy’s three core businesses, alongside E&P and engineering and construction (E&C).

The group currently owns eight semi-tender rigs and eight tender assist rigs. Utilisation rate — which Shahril described as “relatively young” with the average remaining lifespan of 15 to 20 years — currently stands at 35%.

Amid the sectoral downturn in recent years, the group has incurred massive impairments on its drilling assets, including the RM2.1 billion incurred in the fourth quarter ended Jan 31, 2018.

Ambank Research, according to a note dated Nov 22, values Sapura Energy’s drilling assets at RM7.26 billion based on sum-of-parts calculation.

On Nov 11, Sapura Energy inked a joint-venture (JV) agreement with Austria’s OMV Aktiengesellschaft which sees it disposing of 50% of its wholly-owned E&P unit Sapura Upstream Sdn Bhd for a consideration of up to US$975 million (RM4.09 billion).

OMV is one of Austria’s largest listed industrial companies. The tie-up brings financial strength to the JV, and provides a doorway for Sapura Energy to participate in a bigger market globally.

At yesterday’s EGM, Sapura Energy also obtained shareholders’ approval for its RM4 billion rights issue. With the cash call and OMV tie-up practically in the bag, Sapura Energy can put its debt concerns behind, and now focus on tidying up its loss-making drilling segment.

Just like how Sapura Energy secured a strong partner in OMV for its E&P segment, the group has set certain prerequisites for its potential partner in drilling — one that offers it access to a new market and new equipment at a competitive price.

“The price must be right ... The idea is to consolidate supply,” Shahril said.

An analyst told The Edge Financial Daily that a good strategic partnership could mean one that gives Sapura Energy access to deepwater rigs to add to its tender rigs, which are meant for shallow waters.

“That will allow Sapura and the partner to offer total [drilling] solutions for its clients,” said the analyst.

“It could also find a partner that owns shallow water oil fields which can utilise Sapura’s existing capabilities in the segment.

“At the very least, a direct asset sale could provide Sapura with some cash — although I don’t think the plan has anything to do with [raising] cash. It also depends on how comfortable the group is with the pricing that its drilling assets can get,” the analyst added.

CGSCIMB Research, in a note dated Aug 27, said: “We are in favour of any strategic tie-ups for Sapura Drilling as long as it does not involve any cash outlay and on the condition that any share exchange or partial stake sale values Sapura Drilling fairly.”

Currently, Sapura Energy’s order book stands at RM18.2 billion, lasting beyond 2021, of which Shahril said 80% to 90% falls under the E&C segment.

“There will be more [contracts] coming up in the next few months,” said Shahril. He added that E&C margins are currently at 7% of profit after tax level “and growing”.

On whether Sapura Energy’s E&C segment will also welcome new partnership or divestments, Shahril said: “That is our core business, so there is no [plan to do so].”

On Wednesday, Sapura Energy became the second fully integrated O&G player to be appointed by Saudi Aramco as contractors under its long-term agreement programme, after China’s Offshore Oil Engineering Co.

This, said Shahril, will provide access to potential business in Saudi Arabia as well as the broader Middle East and Africa regions.

All in, Shahril said, Sapura Energy now has an access to a market pool worth US$350 billion from a pool of US$35 billion in 2014 — not including its long-term plan with OMV to become one of the largest natural gas producers in the Asean region.

Sapura Energy shares lost half a sen, or 1.45%, to 34 sen yesterday, giving it a market capitalisation RM2.04 billion.