SapuraOMV gas sales agreement with Petronas to improve Sapura Energy’s cashflow

The deal could also benefit the company’s service assets, in particular its E&C division, says analyst

by MARK RAO/ pic by BLOOMBERG

THE recent gas sales agreement involving Sapura Energy Bhd’s jointventure (JV) company SapuraOMV Upstream Sdn Bhd — and its partners — with Petroliam Nasional Bhd (Petronas) will help ease the former’s cashflow and drive a higher utilisation of its assets.

Last week, SapuraOMV Upstream announced that its wholly owned subsidiary, SapuraOMV Upstream (Sarawak) Inc and its partners — Petronas Carigali Sdn Bhd and Sarawak Shell Bhd — have signed the fullterm upstream gas sales agreement with Petronas for the Gorek, Larak and Bakong fields under the first development phase of the SK408 production sharing contract (PSC).

Under the full-term sales agreement, gas produced from the Gorek, Larak and Bakong fields within the PSC will be supplied to Petronas’ liquefied natural gas (LNG) complex in Bintulu, Sarawak.

An industry analyst said the deal is a net positive for Sapura Energy as it reaffirms its commitment to develop the gas field and improve the prospects for the company’s discounted cashflow or projected cash generation in the immediate term.

This could also benefit the company’s service assets, in particular its engineering and construction (E&C) division, the analyst added.

“The gas supply agreement will not benefit Sapura Energy’s drilling assets as the rigs are deployed for mature fields. The SK408 block is a new field.

“However, the company’s E&C division is a potential beneficiary as the development of the field will require the construction of new assets,” the source told The Malaysian Reserve.

The management expects the company will be in the black when the utilisation of its E&C and drilling assets crosses 70%.

While its rigs are reportedly only at a 50% utilisation today, Sapura Energy is expected to benefit from the uptick in brownfield rig activities.

The Gorek, Larak and Bakong fields were part of the discoveries made by SapuraOMV during its 2014 drilling campaign and are being developed as three separate well head platforms for onward sales to Petronas’ LNG complex in Bintulu.

SapuraOMV is the operator for the Larak and Bakong fields, while Sarawak Shell is the operator for the Gorek field.

The SK408 development is expected to deliver its first gas in the fourth quarter of this year and is part of SapuraOMV’s goal to become one of the largest independent oil and gas (O&G) companies in the region.

SapuraOMV is a JV between Sapura Energy and Austria’s OMV Aktiengesellschaft who each hold a 50% share in the company.

The upstream exploration and production (E&P) business was among Sapura Energy’s bright spots during the O&G downturn, which saw the company registering five consecutive quarters of losses up to November last year.

Its high borrowings forced the company to sell a 50% stake in its E&P unit, Sapura Upstream Sdn Bhd, to OMV for RM3.6 billion. It also raised RM4 billion via a rights issue.

The company’s total borrowings had dropped to RM10.01 billion as of April 30 this year from RM16.98 billion, while net debt-to-equity improved to 0.66 time.

SapuraOMV is currently producing 10,000 barrels of oil equivalent per day, which is expected to increase to 30,000 barrels a day next year.

The JV company targets to hit a production rate of 100,000 barrels of oil equivalent per day via exploration, and merger and acquisitions within the next six to seven years.

For Malaysia, SapuraOMV operates blocks SK310, PM323 and PM329, while jointly operating block SK408 with Sarawak Shell. It is also a PSC partner in blocks PM318 and AAKBNLP, which are operated by Petronas Carigali.

Apart from Malaysia, the company has exploration interests in Mexico, Australia and New Zealand.

Sapura Energy last closed one sen lower at 27 sen, giving the company a RM4.3 billion market capitalisation.