This article first appeared in The Edge Malaysia Weekly on February 27, 2023 - March 5, 2023

TALK of Dagang Nexchange Bhd (DNeX) becoming a pure semiconductor outfit has emerged with a management buyout of its 90% stake in Ping Petroleum Ltd said to be in the works.

According to a source familiar with the group, DNeX’s executive director for its energy business division and former group managing director Zainal ‘Abidin Abd Jalil is proposing to take over the group’s stake in the upstream oil and gas (O&G) company. “DNeX is going through the process of demerging its businesses to turn into a pure semiconductor play,” says the source.

The parties are still working out the details, especially the price. DNeX is believed to be looking at a valuation of about US$230 million (RM1.02 billion) for its stake in Ping, based on an exchange rate of 4.44 to the US dollar as at press time.

According to DNeX’s 2022 annual report, the carrying amount of its investments in the Anasuria cluster alone is marked at RM930.39 million. Meanwhile, the carrying value of its investments in the Avalon field stood at RM94.95 million as at June 30, 2022.

However, some quarters argue that Ping’s valuation could be affected by higher taxes in the UK.

The UK government’s decision to implement the Energy (Oil and Gas) Profits Levy Act (EPL) has affected the economics of developing fields in the North Sea. Under the EPL Act, O&G companies operating in the North Sea are required to pay a 35% levy on their profits from January 2023 to March 2028. This is on top of the 30% corporate tax and 10% supplementary charge imposed on O&G companies.

According to CGS-CIMB analyst Mohd Shanaz Noor Azam in a Feb 20 report on DNeX, he expects Ping’s effective tax rate to increase to about 60% annually from FY2023 to FY2025, from 40% previously.

The impact of the higher effective tax rate on Ping had led to CGS-CIMB reducing its earnings per share forecast for DNeX for the financial years ended June 2023 and June 2024 by between 13% and 18%.

To recap, the group’s total investment cost for the 90% stake in Ping is US$88 million, from 2016 to 2021. It also invested US$17 million, through Ping, for 100% interest in the UK North Sea Block 21/6b, which contains the Avalon Oil Development.

Apart from the Avalon developmental field, Ping has a 50% stake in the producing Anasuria Cluster in the North Sea, in a joint venture with Hibiscus Petroleum Bhd.

DNeX, through Ping Petroleum Sdn Bhd, has signed two production sharing contracts with Petroliam Nasional Bhd (Petronas) for the Meranti cluster located 80km off Kuala Terengganu and the A Cluster off Miri, Sarawak. Ping has a 60% participating interest in the Meranti cluster and a 70% participating interest in the A Cluster.

An observer whom The Edge spoke to questions whether Zainal ‘Abidin and his partners have the capacity to raise the funds required to undertake the buyout given that Ping’s book value is almost RM1 billion on DNeX’s balance sheet.

Nevertheless, another source says the valuation of Ping could be lower given the higher taxes on North Sea oil.

This is not the first time DNeX has considered an exit from its O&G investments. In mid-2019, it was looking at no less than RM250 million for its then 30% stake in Ping. However, the plan was aborted and the group went on to acquire another 60% of the O&G company in July 2021. DNeX had acquired the 30% stake in Ping for US$10 million in 2016.

A request for comment on the potential restructuring of the group went unanswered as at press time. Zainal ‘Abidin declined comment for this story.

Zainal ‘Abidin is no stranger to the O&G industry, having served at ExxonMobil for 28 years in various managerial and leadership roles. Prior to becoming group managing director of DNeX from June 2014 to January 2019, he served as CEO of Malakoff Corp Bhd.

Zainal ‘Abidin has also taken assets off the hands of DNeX’s largest shareholder Arcadia Acres Sdn Bhd. On Feb 14, Theta Edge Bhd disclosed that Threadstone Capital Sdn Bhd had acquired a 16.53% stake in the group from Arcadia Acres at an undisclosed amount.

Zainal ‘Abidin owns a 50% stake in Threadstone Capital. Arcadia Acres has 11.37% equity interest in DNeX, being its largest shareholder.

It is understood that the restructuring of DNeX is driven by the need for large capital investments for its businesses. In 2021, the group completed the acquisition of a 60% stake in SilTerra Malaysia Sdn Bhd, the country’s sole semiconductor fabrication company.

“The capital requirement to develop the Avalon field is between US$350 million and US$400 million. This is a huge undertaking for DNeX, especially when SilTerra needs sufficient investments to expand its capabilities and capacity to be sustainable,” says the source.

Back in March 2022, DNeX group managing director Tan Sri Syed Zainal Abidin Syed Mohamed Tahir said the group required between RM600 million and RM700 million in additional capital to expand and enhance the capabilities of SilTerra over a period of two to three years.

At the time, DNeX had already invested RM645 million to increase SilTerra’s annual production capacity by 20% to 10 million mask layers per year, from 8.3 million mask layers per year. The group plans to increase SilTerra’s production capacity to 12 million mask layers per year.

Syed Zainal also said Ping would likely require at least RM300 million to RM400 million in capital expenditure to develop Avalon. While this is a much lower figure than that mentioned by the source, it is still a sizeable amount.

According to DNeX, the Avalon field contains a total estimated ultimate recovery (EUR) of 23 million barrels of oil reserves over a period of 12 years. The oil production is expected to come onstream in 2025, with an initial rate of 20,000 barrels per day, the group stated in its 2022 annual report.

DNeX’s energy business division, which Zainal ‘Abidin currently heads, posted RM207.06 million in earnings before interest, taxes, depreciation and amortisation (Ebitda) and profit before tax (PBT) of RM82.87 million during the financial year ended June 30, 2022 (FY2022).

In FY2022, DNeX recorded a revenue of RM351.44 million from the sale of crude oil. The energy business division contributed the second-largest pretax profit to the group, after the technology division’s PBT of RM484.67 million.

However, the energy business division takes up the most capital expenditure among DNeX’s businesses. In FY2022, the group registered a capex of RM270.43 million, of which the energy business division took up 58.4%, or RM158.05 million.

DNeX’s share price closed at 64.5 sen last Friday, valuing the group at RM2.03 billion.

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