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Scomi Energy’s merger snub might backfire
Khairul Khalid 
Scomi Energy’s shareholders voted to remain a listed entity mainly because of improved crude oil prices
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Scomi Group Bhd’s recent corporate consolidation exercise has yielded mixed results, and may yet come back to bite its listed subsidiary Scomi Energy Services Bhd.

As it turned out, Scomi Energy’s minority shareholders decided to reject a merger with its parent company while shareholders of another subsidiary, Scomi Engineering Bhd, gave the nod to delist and merge with Scomi Group.

While it’s still too early to gauge whether this move will be regarded as a success, an analyst tells FocusM that Scomi Energy’s minority shareholders’ decision not to approve a merger might backfire if the oil and gas (O&G) market continues to struggle this year.

“The decision to maintain the status quo (as a listed unit) was likely influenced by the rebound in oil prices in recent weeks. It remains to be seen if it is the right decision, but it could easily backfire if oil price slumps again.

“The fact that Scomi Energy struck first oil with its Ophir project a couple of months ago, coinciding with the rise in crude oil price, clearly improved shareholders’ sentiments. It is understandable this good news would lead to them feeling that its share price may go up. But there are still a lot of uncertainties in the energy market,” says the analyst.

 

First oil struck in Ophir

On Nov 14 last year, Scomi Energy’s joint-venture company Ophir Production Sdn Bhd announced it had achieved first oil at its Ophir field.

Ophir Production was awarded a seven-year risk service contract (RSC) by Petroliam Nasional Bhd (Petronas) in 2014 to develop the field located in Block PM315, off Kerteh, Terengganu.

Australia-based Octanex Ltd has a 50% stake in Ophir Production while Scomi Energy has 30%. Petronas subsidiary Vestigo Petroleum Sdn Bhd holds the remaining 20%.

Under the RSC with Petronas, the Ophir field will be developed via three production wells, a wellhead platform, and a floating, production, storage and offloading vessel.

Petronas has identified some 20 marginal fields (said to have reserves of less than 30 million barrels of recoverable oil or oil equivalent) to be awarded under the RSC programme. Malaysia has about 105 marginal fields containing about 580 million barrels of oil.

The decision by Scomi Energy’s shareholders went against the recommendation of its independent financial adviser BDO Capital Consultants Sdn Bhd, which said minority shareholders should accept the proposed merger as the offer price was fair and reasonable.

Scomi Energy’s share price had risen from 11.5 sen on Aug 21 last year when the merger plans were announced, to 13.5 sen on Jan 4 when the shareholders voted against it. Since then, it has stagnated at around the same price, closing at 13.5 sen on Jan 18.

Scomi Energy has been in the red for its last seven financial quarters, posting total losses of RM201 mil. Similarly, Scomi Group has been in the red for the last six quarters, posting total losses of RM149.75 mil.

Prior to the merger voting, some thought that delisting the struggling Scomi Energy and bringing it back into the group would be a practical move, at least from a financial point of view.

 

Streamlining finances

The merger was expected to streamline Scomi Group’s operations and finances, as the group refocuses its strategy on rail and renewable energy.

The merger deal was to be followed by Scomi Group divesting some non-core assets, especially in oilfield services, to pare down debts and develop its renewables and chemicals businesses.

The proposed merger involved three listed entities on Bursa Malaysia – Scomi Group, Scomi Energy and Scomi Engineering.

Up to 67.34% (or 292.5 million) of Scomi Energy shares held by 29 shareholders voted against the proposal, while 35 shareholders holding 141.89 million shares, or 32.66%, supported the exercise.

Scomi Group is the single largest shareholder of Scomi Energy and Scomi Engineering, with equity interests of 65.64% and 72.3%, respectively.

 

‘No instant recovery’

Although the decision by Scomi Energy’s shareholders did surprise some market observers, another analyst observes that a merger would not mean instant recovery for Scomi Energy. “There are no guarantees that merging it with the group would turn around its fortunes either.

“The merger move may help improve the group’s balance sheet and efficiency, but there are question marks about the synergies and benefits of the exercise,” says the analyst.

Nevertheless, the rise of crude oil price has clearly swayed minority shareholders of Scomi Energy, for now.

Crude oil, which was trading at around US$50 a barrel at the beginning of last year, climbed to US$68 in the first week of January. Brent hit US$70.37 a barrel on Jan 15, its strongest showing since December 2014.

Under the proposed exercise, shareholders of Scomi Energy and Scomi Engineering were offered the opportunity to swap their holdings for new Scomi Group shares, after which the two companies would be delisted from Bursa.

The corporate restructuring was proposed to consolidate, among others, total debt currently owed by Scomi Engineering (RM526 mil) and Scomi Energy (RM245 mil) under their parent company.

Scomi Engineering is involved in the design, manufacture and supply of monorail trains, while Scomi Energy focuses on drilling, marine services, development and production assets and services.

 

Biggest contributor

The oilfield and marine services division remains the biggest contributor to Scomi’s group revenue. Given the lacklustre operating environment in the global O&G industry, the group’s overall revenue fell by 40.22% in FY17.

The Ophir project remains one of the major energy projects in its portfolio. Following the collapse of crude oil prices, Petronas stated that RSC contracts were not economically feasible because the break-even cost was about US$80 per barrel.

Last year, Petronas approved the revised field development plan for Ophir after cutting production costs by 30%.

Scomi’s oilfield services business contributes almost 85% to the group’s revenue, which underlines the importance of the division to the company.

Although its Malaysian and Australian operations have suffered, the Middle East and other operations in Southeast Asia are still performing. Malaysia contributes only 20% to the company’s revenue.

Scomi Energy currently has an order book of US$1.3 bil, to be recognised over the next two years.

Other than managing costs, Scomi is focusing on markets that are continuing to see growth, such as the Middle East, Russia and Turkmenistan and also exploring new land-based markets such as Kuwait, Algeria and Iraq.

In FY17, weak coal prices affected its marine services segment and impacted overall demand which led to reduced charter rates for transport vessels.

The segment was also impacted by the sluggish O&G market, with the unit’s offshore vessel operations seeing reduced activity due to reduced drilling in Malaysia and Indonesia, resulting in low vessel utilisation.

However, on the bright side, it maintained strong total tonnage of coal shipped, with a 10% increase in volume during FY17, especially for carriage of bulk coal for its customers in Malaysia and Indonesia. This helped to cushion the negative effects of the weak O&G sector.



This article first appeared in Focus Malaysia Issue 268.