This article first appeared in The Edge Malaysia Weekly on May 8, 2023 - May 14, 2023

A merger between Sapura Energy Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) — a unit of Petroliam Nasional Bhd (Petronas) — is being mulled at the highest level of shareholding, sources familiar with the matter tell The Edge.

According to three separate market sources, merger talks are in the preliminary stage and being undertaken at the shareholder level of both companies.

“I would say it is still at an early stage as they [the shareholders] are still in the process of appointing lawyers for the potential merger, so it’s hard to gauge if the proposed merger will be successful even. Nevertheless, you are right, it [the talks] is on the cards,” one source tells The Edge.

He adds, “Truth be told, there are also parties that disagree with the corporate exercise [the merger], and these parties are in positions of power as well, and all this is even before the due diligence has started, so it could go either way.”

Another source confirms hearing that talks are still at a discussion stage between the major shareholders of Sapura Energy and MHB, namely Permodalan Nasional Bhd (PNB) and Petronas respectively. “PNB is mulling merging Sapura Energy with MHB, which is part of the restructuring plan. There are also several other proposals, including a potential white knight coming in. Things are fluid,” he adds.

Sapura Energy’s shareholders’ equity stood at negative RM2.95 billion despite having RM12.71 billion worth of assets as at Jan 31, 2023. Meanwhile, MHB’s shareholders’ equity stood at RM1.77 billion on the back of RM3.36 billion of assets as at Dec 31, 2022.

Meanwhile, another source observes that back in 2015, talk of a potential merger between Sapura Energy and MHB had emerged as both companies have large fabrication yards, but nothing materialised. “It could be that the shareholders are relooking at this now,” the source says.

PNB declined to comment on The Edge’s query, stating, “As a matter of policy, PNB does not comment on speculation.”

It is worth noting that in March, Sapura Energy and its 22 subsidiaries were granted fresh orders to hold court-convened meetings with their creditors within three months. The court also provided the company some breathing space when it agreed to a three-month restraining order against its creditors, which is effective until June 10.

According to court documents sighted by The Edge, Sapura Energy received a “formal letter from a white knight” last February, indicating that the white knight would provide financial support in the form of a RM1.8 billion capital injection, subject to certain conditions.

With the emergence of the white knight, Sapura Energy has filed a new proposal to restructure its RM10.3 billion debt owed to nine lenders grouped under financiers of its multi-currency financing (MCF) facilities. It owes another RM5.12 billion to its vendors.

The court documents did not name the white knight but several market sources believe that it could be a foreign entity.

Sapura Energy is also planning to sell off some of its assets, including its remaining 50% stake in SapuraOMV for RM2.25 billion, and use the proceeds to pare down its debt.

“The main focus for Sapura Energy now is to address its beleaguered debt position and its first priority is to get out from PN17 status. After that only can the company look into any potential mergers,” a source says. 

PNB is currently the single largest shareholder of the group with a 40% stake. The state-owned fund management company also holds the majority, or more than 98%, of the O&G player’s Islamic redeemable convertible preference shares (RCPS-i) of 2.35 billion units that it subscribed for in 2018.

Meanwhile, MHB is a 66.5%-owned subsidiary of MISC Bhd, which in turn is 51% controlled by national oil company Petronas. MHB runs the largest O&G fabrication yard in Southeast Asia, offering engineering, procurement, construction, installation, hook-up and commissioning of O&G offshore structures and modules.

Once a juggernaut in the O&G industry, Sapura Energy is now on the ropes, hoping for rescue options, including a potential government bailout.

Prior to the crude oil rout that started in September 2014, Sapura Energy was an O&G darling among investors. At its peak, its market valuation amounted to RM28 billion in early 2014.

In the years before that, riding on runaway oil prices, the company took on various acquisitions including hefty ones such as Seadrill Ltd’s drilling operations for US$2.9 billion and the Malaysian assets of Newfield International Holdings Inc for US$895 million.

These acquisitions provided an instant boost to Sapura Energy’s assets and earnings and lifted its stock price. However, the acquisitions were made at the top end of the oil and gas cycle, and when oil prices collapsed, so did earnings and the value of these assets, resulting in huge losses and massive asset impairments.

To compound matters, Sapura Energy also aggressively bid for projects after the oil crash in 2014, which resulted in negative returns when the operating environment turned, with shrinking job opportunities and slim margins, if any.

Given its current state, investors have fled and the stock is now trading at 3.5 sen a share, valuing the company at RM560 million, or some 5% of its outstanding debt.

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