By buying Newfield, SapuraKencana has become an integrated O&G company

by **Cals** Sat 26 Oct 2013, 20:52

Published: Saturday October 26, 2013 MYT 12:00:00 AM
Updated: Saturday October 26, 2013 MYT 7:12:04 AM
By buying Newfield, SapuraKencana has become an integrated O&G company
BY TEE LIN SAY
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Shahril: ‘We have the best people in the industry within our group.

EARLIER this week SapuraKencana Petroleum Bhd became an integrated oil and gas player when it won the bid to buy United States-based Newfield Exploration Co’s oil and gas assets in Malaysia for a hefty RM2.85bil.
With SapuraKencana clinching this deal, it officially stands among the few players that are both field owner and one who offers support services. So far, only Petrofac and The Maersk Group fall into this category.
So what does SapuraKencana get from parting with RM2.85bil?
For starters, some reserves of 36 million barrels of oil equivalent (boe) with a daily production rate of 23,000 boe. So let’s say, if SapuraKencana were to drill every day, this would mean that the reserves are good for 4.3 years.
Newfield is the fourth largest oil and gas producer in Malaysia, with interests in nine production sharing contract (PSC) blocks spread over the country.
It should be noted that the PSC partners of the target company’s subsidiaries are to be offered preferential rights to acquire the assets of the target company group.
Newfield owns its Malaysian assets via three wholly-owned subsidiaries, Newfield Peninsular Malaysia, Newfield Sabah and Newfield Sarawak Malaysia. The Malaysian assets delivered some US$400mil (RM1.24bil) of pre-tax profit in 2012.
In April, Newfield made a natural gas discovery off the coast of Malaysia. This discovery was made in the gas field of Block SK 310, where Newfield has a 30% interest. Mitsubishi Corp owns 30% and Petronas Carigali, 40%.
Newfield estimates there are 1.5 trillion to three trillion cu ft of gas initially in place after its discovery.

Differentiation
SapuraKencana was picked as the winner to buy all interests in Newfield Malaysia Holdings after a rigorous bidding exercise involving more than 40 international companies.
SapuraKencana president and group chief executive officer Tan Sri Shahril Shamsuddin had just finished a round of golf at the CIMB Classic, playing with the likes of Phil Mickelson, and Retief Goosen before coming to meet the press.
“I just got off a flight from the UK at 7am this morning. I went straight to the golf course! Played terribly today,” he laughs.
He adds that before boarding the flight, he had called his father, Tan Sri Shamsuddin Abdul Kadir to say: “Dad, I just bought another company.”
Putting in the winning bid came with many late nights. SapuraKencana had a team of nine people which focused solely on putting the bid together.
“On Hari Raya Haji, these guys were still here by late evening. I told them, guys, if you’re not home by the time I get home, you’re all fired! That’s the kind of energy we have here, in our energy division,” says Shahril.
When asked what SapuraKencana’s edge was in winning the asset, Shahril simply says: “Our people. I truly believe, that we have the best people in the industry within our group,”
On now becoming an oil field owner, Shahril says that was not something completely foreign to the group.
“We have been managing the Berantai marginal field. We executed it at large and have been operating it in the last year.
“We have been building up our capabilities in the last five years and we have the facilities, in-house sub-surface capabilities, in-house economic modellers.
“This is an extension of our energy business. The strategy from our overall business hasn’t changed,” he says.
He adds: “We are very comfortable with this acquisition. We will see our debt levels start to go down next year. This is because the businesses with Newfield are already generating funds.”
SapuraKencana has a gearing level of 1.1 times as of June this year. As a field owner and operator, the Newfield business will require a different set of operating principles and as such, SapuraKencana will manage this new business division separately as an independent subsidiary.
SapuraKencana will be financing the acquisition via a combination of internally generated funds and external bank borrowing.
“Our priority now is to complete this acquisition by the first quarter of next year. The financing for this acquisition will be ringfenced. It is a different business with different risk and different expertise. The profiles are totally different. However, there are so many options out there on how to fund it. Its still early days. Lets close first and then we will clarify later. As it is however, Newfield is already value accretive. It will create values that are pretty close to those created for SapuraKencana,” he says.
According to industry sources, the syndicate of banks were led by CIMB Bank andStandard Chartered Bank as the lead bankers, followed by other international banks.

Lowering its debt level
Meanwhile, there have been rumblings that the company could be overgearing itself following the purchase of Newfield.
It now has long-term and short-term borrowings totalling RM10.8bil, which includes the loan from its merger to Kencana Petroleum and bridging facility for the acquisition of tender rigs business. Presently it has an orderbook of RM25bil and cash of RM1.1bil in cash.
Shahril explains it has already been made known that SapuraKencana plans to undertake longer term financing to achieve an optimal capital structure.
“We were in a situation when some of the shorter term bonds were matched to the long-term contracts. So what we are doing now is to combine the bonds, and match it to the businesses and the tenures of the contracts that we have. The debt will be matched to the long-term nature of the assets we have purchased,” he says.
Shahril says that one cannot grow a company without debt.
“You need to see where the debt is going. When we buy something, there are many assets that come with it. Take the Sapura 3000, a pipe laying barge that we bought in the early days. (At a price of US$220mil).
“We issued convertible bonds for it. Today, it is one of our most prized assets. So now we have contracts of RM25bil, but there is cashflow and resources to back it. What we have to manage is the execution of those projects,” says Shahril.
Shahril says that while its still early days, capital expenditure required to produce the fields of Newfield would be at least RM1bil per year.
The few analysts that have issued their reports are mostly positive on the deal.
AmResearch analyst Alex Goh in his AmResearch report sees the Newfield acquisition as a highly attractive entry for a new domestic PSC operator. In fact, based on his numbers, he sees a 42.7% increase jump in SapuraKencana’s net profit to RM1.26bil for its financial year ended Jan 31, 2015.