This article first appeared in The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

SMJ Sdn Bhd, an oil and gas (O&G) company that is wholly owned by the Chief Minister Inc of Sabah, is looking to acquire six more O&G assets from national oil major Petroliam Nasional Bhd (Petronas) in the next six to 12 months. It also aims to conclude its RM1.2 billion acquisition of debt-ridden Sabah International Petroleum Sdn Bhd (SIP) soon.

“Of the six Petronas producing assets that we are targeting, two are in the upstream business, two in downstream and the remaining two are liquefied natural gas (LNG) assets,” SMJ CEO Dr Dionysia Aloysius Kibat tells The Edge in an interview in Kuala Lumpur.

She says the company is in the midst of negotiations with Petronas on one of the two upstream assets, on which she hopes an agreement will be reached by the end of the year.

“We will begin talks on the second upstream asset soon and hope to seal this within the next six months,” Kibat says, declining to name the assets.

SMJ is also targeting two LNG-producing projects. 

Meanwhile, the company is in the final stages of negotiating another LNG project in which it wants to acquire 25% equity interest. This LNG project is expected to be operational by 2027, with the capacity to handle two million tonnes per year. “Hopefully, we can seal this deal by year end,” says Kibat.

Currently, assets in SMJ’s stable include a 50% participating interest in Samarang PSC some 50km off the coast of Sabah and a back-in option of up to 20% participating interest in exploration block SB409, which frees SMJ from exploration investment risks as the company is granted the option to participate upon completion of the commercial discovery.

SMJ also has 25% equity interest in Petronas Chemicals Fertiliser Sabah Sdn Bhd (PCFS), which operates an integrated ammonia and urea production complex (Sabah Ammonia Urea [Samur]) in Sipitang, Sabah.

“PCFS has had a stable cash payout of about RM650 million per year in the last two years — and SMJ will get 25% of that,” Kibat says.

According to SMJ, Sabah produces 41% of Malaysia’s oil and condensate and 18% of natural gas.

On Dec 7, 2021, the Sabah government and Petronas signed a commercial collaboration agreement (CCA) that gives the state the rights to acquire producing assets under the national oil major.

“The CCA is intended to give Sabah greater revenue sharing, a greater say and greater participation in Petronas’ oil-producing assets in the state. It is similar to the commercial settlement agreement (CSA) that the Sarawak government signed with Petronas [after resolving their differences over the imposition of the state sales tax on O&G matters]. But unlike Petroleum Sarawak Bhd (Petros), which goes into operatorship in its projects, Sabah will take on the role of financial investor to take on producing assets in a balanced portfolio of upstream, LNG and petrochemical/downsteam with reputable operators,” says Kibat.

She clarifies that SMJ, which stands for Sabah Maju Jaya, is not to be confused with the name of the state’s development road map (Hala Tuju Sabah Maju Jaya), which stipulates the state’s goals in developing its agriculture, industrial and tourism segments.

The CCA also gives Sabah the right to negotiate free carry of exploration expenses from bidders of exploration blocks and/or back-in options from Petronas offshore Sabah.

According to SMJ’s information memorandum to shareholders, the company had cash and cash equivalents of RM21.1 million as at Dec 31, 2022. Kibat declines to reveal SMJ’s cash reserves following its acquisition of the Petronas assets this year.

When asked about SMJ’s dividend policy, Kibat says: “We will pay out to the state when there is a surplus after paying commitments to sukuk holders and upstream and downstream commitments are met.”

SMJ is advised by Datuk Seri Panglima Lim Haw Kuang, an O&G veteran with 34 years’ experience with Royal Dutch Shell, where he held various senior leadership roles. Lim is also the chairman of the Sabah CCA executive committee, technical adviser to the Sabah government and executive chairman of Sabah Development Bank Bhd.

SMJ’s non-executive board of directors includes Sabah Minister of Finance Datuk Seri Panglima Masidi Manjun, Ministry of Finance permanent secretary Datuk Mohd Sofian Alfian Nair, former Petros CEO Datuk Sauu Kokok and Pelaburan Hartanah Bhd group CEO Mohamad Damshal Awang Damit.

Hot on SMJ’s plate is its ongoing acquisition of SIP from Sabah Development Bhd for RM1.2 billion, says Kibat.

SIP has three core assets — a 10% equity interest in Petronas LNG9 Sdn Bhd (LNG Train-9 project), which operates an LNG plant within the Bintulu LNG complex as well as a floating, production, storage and offloading (FPSO) vessel and a floating storage and offloading (FSO) vessel that are leased to Petronas Carigali Ketapang II Ltd and Carigali-PTTEPI Operating Co Sdn Bhd respectively. The vessels are contracted until 2025 with options for three- and four-year extensions, respectively.

SIP was formerly known as M3nergy Bhd, and Trenergy (Malaysia) Bhd before that, in which Melewar Industrial Group Bhd held a substantial stake then. The loss-making SIP was delisted in 2010 through a management buyout before Sabah Development Bank took it over to recover its loan liabilities.

“The FPSO and FSO are debt-free and posted combined earnings before interest, taxes, depreciation and amortisation of RM170.4 million in FY2022. SIP may have inherited a debt of RM1.6 billion from failed investment activities in its earlier days but it is still a value-accretive asset with good payouts from its 10% stake in LNG Train-9.

“Starting last year, all LNG Train-9 debts were cleared, therefore bringing the payouts to SIP to RM216.7 million in FY2022 from RM6.3 million. There is tremendous potential in this asset,” Kibat says, adding that the contract has another 13 years to end of life.

In an Aug 22 note, RAM Rating Services Bhd anticipates positive cash flow generation and strong debt coverage from SMJ, owing to its investing in mature and profitable O&G assets.

“Over the next three years, SMJ is projected to achieve an average annual net operating cash flow (NOCF) of about RM491 million. This is a conservative number since the cash flow projections are based only on existing assets (Samarang PSC, Samur and SIP) and SMJ’s conservative long-term crude oil price outlook relative to current prices.

“SMJ plans to issue sukuk worth up to RM1.2 billion to fund costs in relation to the acquisition of SIP in 2023 and another RM200 million to fund ongoing capital expenditure (capex) requirements in 2025. This translates into a strong NOCF debt cover of around 0.3 times over the next three years,” says RAM Ratings.

The Companies Commission of Malaysia data shows that SMJ’s gearing was reduced from 1% in 2020 to 0.14% in 2022.

“We expect SMJ’s indebtedness to rise as it ramps up the acquisitions of Petronas assets. As the investments will be earnings-accretive from the onset, we expect gearing to decline over time,” RAM Ratings says, according a AAA rating to SMJ’s proposed Multi-Currency Islamic Medium-Term Notes (Sukuk Wakalah) Programme of up to RM10 billion.

Last Friday, SMJ priced its inaugural RM900 million Islamic medium-term notes.

The sukuk wakalah has a tenure of between five and 15 years and carries a profit rate of between 4.23% and 4.67% per year, says SMJ in a joint statement with AmInvestment Bank, the principal adviser and lead arranger for the sukuk programme.

The inaugural issuance closed with an order book of RM3.5 billion, translating into a bid-to-cover ratio of 3.9 times, subscribed for by a diverse group of investors in Malaysia, the statement says. 

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