VOLATILE is one word to describe just what SAPURA ENERGY BHD’s share price and opinion on the stock have been since it released a big quarterly loss the market was not expecting.
Its shares continued to fall yesterday as it closed down 13.5 sen to 83 sen, after plunging 24.5 sen to 96.5 sen in heavy trading on Thursday.
As sentiment surrounding the stock sours, the counter was again heavily traded and market analysts too displayed the difference in opinion regarding the company a day after it released its third quarter numbers.
There were downgrades and upgrades by market analysts yesterday after the results were announced. The gulf in opinion between those two ends show just how the market is still digesting the prospects of Malaysia’s largest listed oil and gas stock which in its own estimation, is going through a rough period.
Sapura Energy’s net loss of RM274.4mil for the quarter triggered alarm bells for the market.
The stock, which just placed out a large chunk of shares in early November, has been eking out profits in the majority of quarters since the collapse of crude oil prices in late 2014, seemingly buckled under the continued weight of the slowdown in the oil and gas sector where drilling activity has come to a virtual snail’s pace as oil producing countries start to impose self-determined quotas on production that have been extended by another year.
President and the group chief executive officer Tan Sri Shahril Shamsuddin points out that despite the loss, the group on an ebitda basis saw a profit of RM253mil.
“The environment continues to be challenging and will persist in the short and medium term. The group is currently considering various strategic and operational plans to mitigate the impact and improve the group’s competitive position,” he says in a statement.
He says that for the services business, Sapura Energy remains committed in securing new projects globally.
“Our recent contract wins of RM1.5bil signify the group’s ability to remain competitive in expanding our footprint and service offerings. Concurrently, we continue to focus on executing existing projects in South-East Asia, India, Turkey and Brazil.
“In our E&P business, we have completed the SK310 B15 gas field development project. This achievement demonstrates the capabilities of our team to deliver projects on schedule and within budget.
“We are confident that the commencement of SK310 B15 gas production combined with development opportunities presented by the significant discoveries in SK408 gas field, will provide long-term financial visibility to the group,” he says in the statement.
Analysts who were surprised by Sapura Energy’s big loss, mainly as a result of weakness in its engineering and construction (E&C) arm, points out to many other issues it sees with the group.
“Sapura Energy’s 9MFY18 earnings significantly missed expectations as losses surged ahead of revenue declines in most segments. Although there is no risk to cash flow, management is not able to guide for any earnings catalysts.
“We slash our forecasts to reflect expected further losses, but still assume the company needs to secure another RM1bil to RM2bil in new orders that can be recognised immediately,” says UOB Kay Hian in a note yesterday.
UOB Kay Hian, which has a target price of 68 sen for Sapura Energy, says that although it had expected wider losses in the rigs (on multi-year low utlisation of only five working rigs), the biggest deviation was that the E&C also recorded losses in the quarter, while energy earnings declined (despite higher oil prices) as the effect of cost write-backs from other oil fields is no longer present from this quarter.
With the group seeing lower operating cashflow and higher capex for its oil and gas fields, the company’s cash has dwindled by RM1bil to RM1.9bil and net gearing inched up to 1.3 times.
The broker’s report says that Sapura Energy’s order book is RM15bil and the company needs to add another RM1bil to RM2bil in new jobs in order for revenue to hit between RM5bil to RM6bil.
“Tenderbook remains high at US$8bil (with about US$5bil tenders at late-stage bidding), however the timing and quantum of contract awards are still uncertain,” it says.
The report says the low utilisation of the rigs is a concern and although the company is actively pursuing contracts, the likelihood of near-term contract wins is unclear and unlikely in the immediate term even though there is demand for 14 tender rigs up to 2020 (about 11 in South-East Asia).
It notes what management has said about the low visibility in the oil and gas industry and the challenges ahead, and while there will be gains from the first gas from its B15 field in the fourth quarter, the impact will be neutral. Also, there could be impairment risks for rigs that have recently expired.
Affin Hwang Investment Bank too downgraded the stock to a price of 73 sen a share and sees Sapura Energy continuing to post record losses.
“Operationally, the E&C and drilling divisions will likely continue to see challenges in terms of fewer activities. To make matters worse, annual depreciation and finance costs remain high to the extent that operating cash flow was only sufficient to cover interest payments in 9MFY18,” it says.
But not analysts were sceptical over the prospects of the stock.
CIMB upgraded the stock amid the selldown on Thursday as it felt that long-term value was emerging after the steep drop in the company’s share price.
It feels losses will narrow from Sapura Energy’s 2019 financial year and what sunk its results, the engineering and construction arm, may show improvements in the second half on its next financial year.
“In other words, the next 6-9 months may be challenging for the E&C division, but Sapura Energy appears more optimistic for 2HFY19F,” it says. It estimates that the E&C division, which is forecast to have a revenue of RM4.3bil in 2019, has contracts worth RM1.5bil in hand for the year but revenue could rise to RM4bil should it win jobs it has tendered for.
CIMB feel the poor rig utilisation rate going forward will also improve.
Sapura Energy has a tenderbook of US$9.5bil, its largest ever, and contract wins will help raise revenue for the E&C division and also rig utilisation, which CIMB has forecast to reach 40% in its 2019 financial year.
The money poured into the development of new oil fields will also help improve the cashflow Sapura Energy is start to generate from next quarter onwards, and while some feel the new assets will replenish the depletion seen in the current fields, the higher prices for oil and gas will mean additional cashflow for the company.
Cashflow generation is something the group was keen to stress on and that is what PublicInvest Research points to when it says the group currently makes sufficient money from its operations to service debt repayments in addition to paying taxes although it is of no great comfort to shareholders as there isn’t much left for dividend payments.
“With no immediate lumpy loan repayments needed over the next year or so, and with capital expenditure plans budgeted for, the group should be able to navigate through the currently-challenging environment without much worry.
“On the back of expected operational improvements in subsequent financial years, and by extension cash flows, we see its financial position as healthy with no particular need for cash calls,” it says.
Cashflow is an important condition for Sapura Energy in these trying times.
A banker says that the reason why banks gave a two-year debt reprieve to Sapura Energy is the knowledge that once oil and gas is produced from the two blocks it has, its cashflow situation will return to normal.
“They know how the company has been affected by the global slump in crude oil prices. Furthermore, they have the trust that Shahril will turn things around,” says a banker.