New chapter for Sapura Energy with power shift

il and gas company prepares for life after Shahril (pic)

AFTER two and a half decades at the helm, Sapura Energy Bhd’s president and chief executive officer (CEO) Tan Sri Shahril Shamsuddin is retiring in March next year.

Shahril, who will be 60 then, has been the face and key driver at Sapura Energy. He, in fact, co-founded the company which has been a part of the group of companies started by his family - one of Malaysia’s illustrious bumiputra business families.

The well-known oil and gas (O&G) man will be passing the baton to non-executive director Datuk Mohd Anuar Taib, who came on board in August, the company announced on Monday.

Mohd Anuar comes with a well-established network with Petronas and Shell, and has a forte in the upstream business.

During his time at the helm, Shahril was instrumental in growing Sapura Energy into a global O&G outfit, serving the entire upstream value chain.

At its peak in 2013, the company commanded a market capitalisation of close to RM29bil and is one of the top five O&G players worldwide. However, since the oil rout of 2014, its share price has headed south.

The company has also been grappling with several controversies in recent years. One was Shahril’s high remuneration package, which came under scrutiny as the company struggled to generate profits amid slowing O&G activity.

There was also talk of a strained relationship between the entrepreneur and Permodalan Nasional Bhd (PNB), which now is the single largest shareholder with a 38.1% stake after the completion of a rights issue exercise in 2019.

This arose following the high-publicised resignation of Abdul Jalil Abdul Rasheed as president and group CEO of PNB and chairman of Sapura Energy in mid-June.

Business-wise, the company’s underperformance and huge debt have put PNB, which has invested a substantial amount into the company, in a dilemma in the event another cash call is required.

In another development this week, the company came under the spotlight over corruption allegations with regards to contracts with Petrobras, Brazil’s state-owned oil company.

The contracts involve Sapura Energy and joint venture partner, Seadrill Ltd and is the second corruption probe it is facing in Brazil.

However, Sapura Energy has strongly refuted the corruption allegations in its business dealings in Brazil and elsewhere in the world. While Shahril has been with the company long and has a track record, analysts say the economics and scenario have changed.

“Perhaps a new approach, driven by professional managers, is what is needed with PNB, ” one analyst says on the leadership transition. Despite near-term challenges, he sees it as an opportunity “to restart and look at things from a fresh perspective given past legacy issues”. Still, the timing caught many by surprise in view of the group’s ongoing cost-reduction and debt restructuring exercises.

Shahril also did not provide any indication of his planned retirement at the company’s second quarter ended July 31,2020 (2QFY21) briefing for analysts that was held on Friday last week.

Although Shahril is stepping down, the family’s investment vehicle Sapura Holdings Sdn Bhd, which now owns 12.8% of the stock, will not be totally out of the picture.

Sapura Holdings Sdn Bhd is paid intellectual property rights, trademarks and branding fees, which observers say is akin to “finders fees” for business and contracts brought in.

This figure has been about RM70mil in the past, but has come down in the past few years, its annual reports showed.

In 2019, RM20mil was paid, while for 2020, the amount is RM10mil and is due and payable in April 2021, its 2020 annual report disclosed.

More interestingly, Sapura Energy will see two former Petronas officials at the reins next March. Besides Mohd Anuar, who will be chief operating officer and CEO designate from Oct 1 as part of a six-month transition, ex-Petronas CEO, Tan Sri Shamsul Azhar Abbas was appointed Sapura Energy’s non-executive chairman at the end of July.

Will the Shamsul-Mohd Anuar team be able to turn around the company and restore investor confidence?

Compared to Petronas, which is a “big organisation with unlimited financial resources” it is a different ball game altogether at Sapura Energy, some reckon.

For now, what is likely to take precedence is addressing the group’s weak balance sheet. Sapura Energy has a RM10bil debt that still needs to be refinanced with 14 banks by December 2020, according to AmInvestment Bank.

As for short-term borrowings, KAF Research notes that it still has dollar-denominated borrowings worth RM1.4bil, and an additional RM1.7bil ringgit-denominated borrowings to be repaid within a year.

The group, it is understood, is in discussion with lenders for refinancing and hopes to complete this by the Q4FY21.

Even so, Maybank Investment Bank’s research arm does not rule out another round of cash call to recapitalise the company’s balance sheet.

It notes that Sapura Energy is highly leveraged, at 1 times net gearing and 15 times net debt/ Ebitda. It has been in a net current liability position for the past four quarters, which is a concern, the research firm points out in a report.

Maybank IB estimates that the company needs to sustain a cut of RM800,000 per year in costs to lift its EBITDA to RMR1.3bil to achieve a seven times net debt/ EBITDA target in order to match its planned seven-year debt repayment programme.

Additional equity-raising, however, could translate to a massive dilution given the current low share price, say analysts. It also remains to be seen whether PNB, which forked out RM2.68bil for its stake and sitting on huge paper losses, would plough more money into the company.

Alternatively, the company could sell some of its assets, but that would be tough in the current soft market.

Beyond this, what would be of interest is the direction Mohd Anuar would want to steer the company. Although the company has successfully lowered its operational cost and turned in two consecutive quarters of profits, analysts are mixed on whether this momentum can be maintained amid the industry’s challenges.

Considering the likelihood of job deferrals following the outbreak of Covid-19, analysts say it could experience losses and asset impairments in the upcoming quarters.

As far as jobs are concerned, AmInvestment Bank notes that Sapura Energy’s 2QFY21 outstanding order book had decreased 5% quarter-on-quarter to RM13.3bil as its new wins of RM840mil were insufficient to offset the Q2FY21 depletion of RM1.2bil.

“Even though the group is bidding for RM29.4bil of new jobs with an additional prospective projects worth RM63bil, the order book could still decline over the next two quarters as clients are likely to postpone the awards until next year if the current gloomy offshore outlook persists, ” it said in a recent note to clients.

In the longer term, some think that Sapura Energy could potentially be restructured to be more focused on exploration and production (E&P), especially with Mohd Anuar’s forte in upstream business.

Of the segments the group is involved in, Maybank IB notes that the engineering and construction segment is a tough business, being cyclical and orderbook-driven that come with cost-overrun risks. Meanwhile the tender drilling operations are also seen as a sunset industry. For now, the analyst fraternity is cautious with 10 “sell”, five “hold” and two “buy” calls, according to Bloomberg data.

In terms of share performance, prices have trended down from Monday’s 12 sen to 10.5 sen yesterday, giving the stock a market cap of RM1.687bil. But with PNB in control and a new leadership, the stock would be one to watch.

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