The oil and gas conundrum

Fresh capital needed: PublicInvest Research expects Sapura Energy shares to trade at a target price of 6 sen each, which is 40% lower than the current price of the counter.

The underperformance of Sapura Energy Bhd and Velesto Energy Bhd has put Permodalan Nasional Bhd (PNB) in the spotlight.

Both companies have had PNB as their major owners.

But over the last few years, PNB had invested significant amounts of capital into the companies, thereby taking a huge bet on the oil and gas (O&G) sector.

Since 2017, PNB had invested almost RM4bil into Sapura Energy and Velesto via rights issues of both companies.

Notably, PNB injected about RM800mil into Velesto in 2017 and RM2.7bil into Sapura Energy in 2018, by subscribing to the fundraising exercises of those firms.

The subscription of the issuance of the new shares in these companies had led to PNB becoming the largest shareholder in both companies -- owning 40% Sapura Energy (from 12% previously) and having a 62% stake in Velesto.

This had raised questions about whether PNB would be looking to rescue the beleaguered O&G service providers, who had been hit hard by the 2014 crude oil price crash.

Without the fresh capital, these debt-laden and cash-strapped companies would have struggled. On the other hand, pumping them with capital would give them an opportunity to ride the oil sector’s recovery.

Sapura Energy and Velesto were once darling stocks on Bursa Malaysia but were badly hit when crude oil prices crashed in end-2014. Many oil producers, including Petronas Nasional Bhd, had cut their capital expenditure resulting in billions of dollars of assets of the service providers being left idle.

Sapura Energy traded at RM4.56 per share in January 2014. But the stock is now worth 9.5 sen a piece.

While Velesto, which was previously known as UMW Oil and Gas, had reached its all time high of RM4.32 per share, also in 2014. The stock now trades at 16 sen a piece.

On the back of the envelope calculation, PNB could be sitting on RM1.8bil of paper losses from the monies it spent on the recent rights issues of both Sapura Energy and Velesto.

The massive rights issues

In 2017, Velesto launched its rights issue at 30 sen per share to raise almost RM2bil to reduce its debt.

This was followed by Sapura Energy in 2018, with a RM4bil rights exercise, also to reduce its debt. PNB underwrote that exercise for the unsubscribed portion.

The new shares were issued at 30 sen per share with free warrants.

The recovery in O&G companies could be tricky, especially with the recent crash in global oil prices that saw oil prices go below US$20 per barrel.

Oil majors including Petronas have reduced their expansion and operation expenditure to cope with shrinking oil demand due to the outbreak of the coronavirus (Covid-19) pandemic and oversupply situation.

In the case of Velesto, despite posting a strong first quarter of 2020 financial results, analysts warn that the firm could go into losses due to declining job orders.

CGS-CIMB has cut its target price on Velesto to 10 sen a share from 17 sen a share due to “significant downside risk” on the company outlook.

It said for this year, Velesto, which is mainly in the business of chartering jack-up rigs, could see its utilisation rate reduced to 60% from 70% estimated earlier.

But, the research house stressed that based on the current contracts that Velesto has secured, the company’s utilisation rate in the financial year 2021 and 2022 could be to the tune of 17% and 14%, respectively.

“This suggests that there are a lot of downside risks to Velesto’s earnings.

“Velesto said at its analyst briefing that Petronas had warned of insufficient work to utilise all of Velesto’s rigs, ” CGS-CIMB said in a report last month.

But thanks to its fundraising exercise, Velesto is in better shape in terms of its debt level from about 0.9 times to 1.4 times gearing in FY15-16 to 0.3 times this year.

Meanwhile, in the case of Sapura Energy, although the company is sitting on a big order book of almost RM15bil that should translate to earnings visibility, some analysts remain bearish on the company.

PublicInvest Research expects that Sapura Energy would report losses in the coming years due to margin compression in the upstream sector, the low utilisation rate of its assets, and potential project deferments.

“The Group is expected to report a loss of RM612.4mil in the financial year 2021 and will remain in losses for FY22 and FY23 of RM408mil and RM194.3mil, respectively, ” it said in a report earlier in June.

The research house estimated that shares in Sapura Energy to trade at a target price of 6 sen per share, which is 40% lower than the current price of the counter.

But, what is more worrying is that, despite the massive rights issues in 2018 which helped it reduce some of its debt, Sapura Energy is still sitting on debts of around RM10bil.

For the financial year 2020 ended January 31, Sapura Energy sank into the red, posting net losses of RM4.56bil due to a whopping RM3.3bil provision for impairment, despite higher revenue growth.

This was in comparison to the net profit of RM207.55mil in the financial year 2019.

For FY2020, revenue rose by 41% to RM6.45bil from RM4.57bil a year ago.

Volatility in the oil market

To be fair, investing into the O&G sector has always been challenging due largely to the volatility of crude oil prices.

Back in 2018, PNB explained its investment into Sapura Energy and Velesto as one aimed at reducing the debt levels of these companies and thereby putting them in a better position to take advantage of improvements in the O&G sector.

PNB had said that Sapura Energy was one of the few local companies with a strong track record and a significant global presence in over 20 countries.

It also said that the rights issue price of 30 sen, together with the free warrants, represented an attractive entry price for PNB.

Notably, PNB’s recent investments into Sapura Energy and Velesto were made during the tenure of Datuk Abdul Rahman Ahmad as the fund’s CEO.

PNB is in the news after its CEO Jalil Rasheed resigned from his position, after having been appointed to the role just eight months ago in October 2019.

Jalil has also stepped down from his position as chairman of Sapura Energy.

The company then appointed Tan Sri Hamid Bugo as its new chairman, who is also the chairman of Petroleum Sarawak Bhd (Petronas), an O&G exploration firm established and owned by the state government of Sarawak.

The recent development would be an interesting one considering that Sapura Energy has gas production fields in Sarawak, which has become more stringent in companies that are operating on its waters.

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oil , gas , PNB , Velestro Energy , Permodalan Nasional ,


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