A mammoth task for Sapura Energy

Staying afloat: A Sapura Energy vessel. The oil and gas company hopes to use around RM1.5bil to RM1.8bil from asset disposals for working capital purposes.

“THE first priority is to survive 2022,” quips Datuk Anuar Mohd Taib, group CEO of beleaguered Sapura Energy Bhd.

The oil and gas (O&G) stalwart, who was once tipped to helm Petroliam Nasional Bhd or Petronas, assumed the top job at Sapura Energy some 15 months ago.

At that time, Sapura Energy was already facing a myriad of issues, especially its mounting debt.

But the company was in an even worse position prior to Anuar’s entry, when total debt had hit a whopping RM16bil. In 2019, Sapura Energy, then still under the helm of Tan Sri Shahril Shamsuddin, managed to lower that debt to the RM10bil level, after getting Permodalan Nasional Bhd (PNB) to take up the bulk of a RM4bil share sale in 2019.

That exercise is now a major topic of discussion – why did PNB pump in so much into a single company?

Much of PNB’s equity value has dissipated since then, as Sapura Energy was not able to take advantage of that fresh new capital to fix its problems.

Fast forward to today and Anuar explains that the company is struggling with “legacy contracts”, which are essentially deals entered into following the 2014 oil crash but which have now turned out to be a drag on the company. It now faces the daunting task of having to restructure its debt and get the nine banks it owns monies to, to come to an agreement. On top of that, Sapura Energy needs to have access to fresh capital in order to carry on its business.

Speaking to StarBizWeek exclusively, Anuar maintains a calm demeanour but doesn’t deny the seriousness of the situation Sapura Energy is in.

“Sapura Energy can no longer sustain its operations under its current debt load, which demands almost half a billion ringgit in interest payments annually. The faster we can restructure our debt, the better.”

Sapura Energy has laid out a detailed debt-restructuring plan, which is now being discussed with its creditors. What stands out in the plan is that the nine banks that are owed a total of RM10.3bil have to take a massive 75% haircut.

Surprisingly, Anuar says that Sapura Energy has received “majority support” from its nine lenders to start negotiations.

To be sure, if these banks take such a haircut, it would impact their books. It is not known which are the banks and how much each is owned or how much of provisioning they have already done.

One banking analyst says that the debt of Sapura Energy is unlikely to have a significant impact on the banking sector, as it is not a single bank exposure and because the banks may have already provided for this over the years.

“The objective is to get back to sustainability, reduce the debt burden, ensure we can pay past dues to our vendors, generate enough margins and raise working capital to fund future projects.“The objective is to get back to sustainability, reduce the debt burden, ensure we can pay past dues to our vendors, generate enough margins and raise working capital to fund future projects.

So what went wrong in the first place and what exactly are these “legacy contracts” that the company has to contend with?

Anuar says Sapura Energy inherited this problem from the previous management that took the decision to aggressively bid for projects after the oil crash in 2014.

“The downcycle of the O&G sector, which started with the oil price crash in 2014, lasted for almost seven years. During that time, many service providers like us went into aggressive bidding as we chased the shrinking job pie. Oil majors had cut their capital expenditure.

“With the prolonged under-investment by the oil majors coupled with the competitive tension among those of us bidding for projects, the result was that the clients passed most of the risk to us. This is why all of us in O&G services are in trouble,” he says.

Adds Anuar, “We have many projects that are returning a negative value. All of our losses are stemming from these legacy contracts.”

Anuar points out that the Covid-19 pandemic exacerbated the situation.

“When the Covid-19 pandemic hit, some O&G services firms started restructuring, but we thought we could continue, at least this was the understanding.

“I joined in 2020 as chief operating officer and then took over the CEO’s role in March 2021. At first, we did not understand the extent of the challenges. But after taking over the helm, we realised that the company has a lot of these ‘legacy contracts’ with challenging margins.

“The price of executing these contracts was spiralling up due to things like rising steel prices. It affected many other players too,” Anuar says.

Anuar took over from Shahril, who had headed the company since July 2004 when it was still known as Crest Petroleum Bhd, a unit of Renong Bhd.

Shahril, who has a 13% stake in Sapura Energy, is facing scrutiny over his remuneration when he was with the company that has totalled hundreds of millions of ringgit.

Recall that in 2018 some shareholders such as the Employees Provident Fund (EPF) had voiced their unhappiness over this. For the financial year ended Jan 31, 2018 (FY18), Sapura Energy posted a net loss of RM2.5bil while Shahril’s remuneration had totalled a whopping RM71.92mil.

Asset divestments in the offing

During its heyday, Sapura Energy had a market capitalisation of close to RM30bil, becoming one of the world’s largest O&G service providers.

At its current state, Sapura Energy has clearly lost the interest of the investment community. According to a poll by Bloomberg, 11 out of the 13 analysts covering the stock rate it as a “sell” even at this low price, a far cry from when the company was a screaming “buy”.

Now it is trading at 3.5 sen a share, giving it a market capitalisation of RM560mil, a shadow of its outstanding debt.

It has nine lenders waiting to get paid that RM10.3bil and owes another RM1.5bil to 3,000 odd vendors.

“The objective is to get back to sustainability, reduce the debt burden, ensure we can pay past dues to our vendors, generate enough margins and raise working capital to fund future projects.

“Divestments will help us do that,” he says, adding that the company is unlikely to tap more equity funding to solve its problems.

So what is Sapura Energy going to sell?

Anuar remains tight-lipped on the assets it has earmarked for sale. But he gives a good hint – the group wants to focus on its services, which means lesser focus on exploration and production (E&P). This means that assets in the latter category are likely to be up for sale.

Sapura Energy’s E&P assets include a remaining 50% stake in SapuraOMV, a company that operates oil fields in shallow Malaysian waters.

In 2018, Sapura Energy sold 50% in its upstream oil field assets to the OMV group, an Austrian-based outfit, to create SapuraOMV. The stake sale brought it US$890mil (RM3.7bil), with most of the proceeds being used to retire some of Sapura Energy’s debt.

At that time, Brent crude oil price was trading at US$70 (RM295) per barrel.

At today’s oil price, Sapura Energy could fetch a high price for its remaining stake in SapuraOMV .

Sapura Energy has other sizeable assets, including its fabrication yard in Lumut, six semi-tender drilling rigs, six tender assist rigs and some vessels.

Aside from retiring debt, Anuar says he hopes to use around RM1.5bil to RM1.8bil from asset disposals for working capital purposes.

Legacy contracts remain a drag

Going forward, Sapura Energy still has to contend with the fact that around 60% of its order book is made up of “legacy contracts”.

Interestingly, Anuar has a target to lower the company’s “exposure” to such contracts to 27% from the current 60% by the end of 2023.

This is to be achieved by a combination of renegotiating some of the old contracts and winning new ones.

“We need to renegotiate five key contracts so that we can deliver those projects and gain from the interim high oil prices. The idea is also for us to get into a position where we can deliver the contract and not get injured in the process,” Anuar says.

If there is one consolation, it is that Sapura Energy is not alone.

Almost all the listed O&G service providers in Malaysia had gone into overdrive during the days of high oil prices from 2011 to 2014. They over-geared and then suffered when the 2014 crash took place.

These included the likes of Barakah Offshore Petroleum Bhd, Bumi Armada Bhd, Perisai Petroleum Teknologi Bhd, Velesto Energy Bhd, Icon Offshore Bhd and Alam Maritim Resources Bhd. Many of them had to embark on restructuring with the help of the Credit Debt Restructuring Committee (CDRC).

Some did not survive. Perisai Petroleum, a darling stock of Bursa Malaysia prior to the 2014 O&G crash, had to be liquidated after its regularisation plan did not pan out.

For Sapura Energy, this is not the first time it is needing to restructure its debt. In fact, what seems to be clear is that Sapura Energy is a company that is not only in need of a major debt restructuring, but also a complete overhaul. Only then can it have a chance of sailing back to health instead of repeating its past mistakes.

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