‘We need to restructure our debt to move forward’

“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." Datuk Anuar Mohd Taib

THE stakes are high for Datuk Anuar Mohd Taib, the group CEO of ailing Sapura Energy Bhd. He faces the daunting task of overseeing one of corporate Malaysia’s largest ever debt restructurings, a problem which he inherited when he joined the group in 2020.

A thunderstorm is battering the Sapura Energy headquarters on the afternoon of this exclusive two-hour interview, but nothing seems to rattle the calm and collected Anuar as he tackles the tough questions posed by StarBizWeek. Excerpts:

StarBizWeek: The massive debt restructuring may not be enough for Sapura Energy to fix its problems. Is the company going to also restructure its operations?

Anuar: First, we are not looking for a bailout. The oil and gas (O&G) market has been difficult, as there has been chronic under-investment in fossil fuels. This means that there have been fewer contracts for companies like us that build platforms and rigs.

A lot less offshore work is being done. As a result, many industry players were bidding for jobs of any size, given that the pie had grown smaller. Sapura Energy decided to continue pursuing new businesses, that is my understanding.

In the past few years, we have had a number of legacy contracts with challenging margins. This has been made worse with Covid-19, as execution and operating costs went up.

Almost all our losses were the result of legacy contracts that were won on razor thin margins. On hindsight, we could have done better with risk management, but the smaller pie made the market very competitive.

As a result of the prolonged under-investment and the competitive tension that we subject each other to, clients pass all the risk to us.

All of us are in trouble. Many of our peers face the same difficulties and are taking similar steps to reset their business. We have significant contracts that are giving us negative returns.

In 2019, Sapura Energy underwent a restructuring to pare down its debt. Why was that not enough to turnaround the company?Over the many years, the RM16bil debt has been repaid in both principal repayments as well as interest.

Today, we have a remaining debt of RM10.3bil and we are paying half a billion ringgit per year in interest alone, which is not sustainable. We need to restructure this debt.

Last year (financial year 2022 or FY22), on an operational basis, we recorded a loss of RM2.2bil, and almost all of it came from legacy contracts. These are contracts we gained before FY21 and in many of those contracts there are no Covid-19 provisions.

The group incurred RM286mil in Covid-19 direct costs for FY21, bringing the cumulative amount to about RM560mil since the beginning of the pandemic.

So, with these thin margins and aggressive competition, that is how the O&G industry eroded its value. We also owe about RM1.5bil to vendors. At an operational loss of RM2.2bil, how are we going to make these payments?

We have decided to refocus and measure success not in terms of revenue alone but also in terms of profitability - creating enough margin so that we can reinvest the cash.

This is why we need to restructure our debt to move forward, so that we have enough cash to pay our vendors.

Many debt-restructuring exercises in the past have seen vendors taking massive haircuts. How many vendors does Sapura Energy have?Of the total 3,000 vendors, 2,500 are Malaysian and include micro businesses. Micro businesses are the ones in Lumut, Sitiawan, Manjung, Pasir Gudang, Miri, Labuan and others and they number 1,700.

The O&G sector requires equipment and structures of very high standards. They need to be maintained well. You do not want it to crash during the monsoon season. Even if we win more contracts in the future, without vendors I cannot deliver.

We cannot afford to carry RM10.3bil in debt. We need to restructure. Lenders must realise that they will have a working company in us that can continue to do work, especially at this time in the O&G cycle.

In the next two or three years, it is a good time for Sapura Energy to do business.

But I cannot proceed to do good business if I don’t address how we pay past dues to vendors, how we reduce unsustainable debt and how we strengthen the company to capitalise on the opportunities of the next two to three years.

Aside from debt, are there also operational issues with Sapura Energy?

I am renegotiating about RM1.3bil with clients. If the clients decide to allow us to have some of that revenue back, it will go towards this year’s earnings. I also need to figure out how to reduce operating costs.

Some people may say you can cut overheads by laying off people. But for a service company, it’s not that simple.

When you have fewer people, you’ll take longer to finish a project, and you have to absorb the cost of the delay, so it doesn’t make sense.

In our case, yes, we need to review cost, but most importantly, we are starting with what we call “bid right and execute with discipline”.

Bidding right means you bid in the right market where you can best demonstrate your capability, the right cost, and you also need to look at the whole risk management scenario.

At the start of FY22, we had about RM54bil in our bid book, which we have reduced to about RM28bil at the end of FY22 because we want to be very targetted so that we know when we submit that as much as possible, there is no error.

We are looking at high-quality bids at the right cost with all the risk provisions in place.

It’s also important to remember that in 2019, I don’t think anyone saw Covid-19 coming, or had the foresight that it would last this long.

If you put the right processes in place based on the information that you have, you are not missing anything that needs to be done, then you are as right as you can be.

Once you get into execution mode, you need to follow the bid and you must deliver.

Sapura Energy has billions of ringgit in its order book. Are all of them likely to incur negative margins?

Going forward, even in the last quarter, we had new contracts that have shown positive margins. A lot of the contracts run for multiple years.

We have installed a new structure, risk management framework and bidding framework. For the fourth quarter (Q4) of FY22, legacy contracts were at 60%. So, by Q4 of FY23, our exposure to the existing contracts will be down to about just 27%.

Sapura Energy is also facing cash-flow issues. Will you require a fresh capital injection, and if so, how are you going to do it?First, I must renegotiate with the clients, to limit our losses. We need to renegotiate five key contracts so that we can deliver those projects for clients to gain on the interim high oil prices, and for us to get to a position where we can deliver but not be injured in the process.

Moving forward, we require our projects to be self-funding, that is, they generate enough cash to fund their own progress.

For new wins, we have implemented a robust risk management framework to make sure we take on contracts and projects that will not hurt us in the long run.

If we can’t renegotiate and if there is a right to terminate, we will have to take that difficult decision.

For example, the difficult step we took with the Yunlin contract. This is an industry where the contractor will try to do everything themselves, but if it results in you injuring yourself, then what’s the point? We need to work together.

At times of need, we build bridges. Business runs through cycles, good and bad.

Secondly, we need to work with the banks. What we are asking for is for them to consider a much lower payment so that it reduces the cash-flow impact.

They are supportive of our scheme of arrangement. Without their support, we would not have been able to undertake the standstill.

So, the next thing that we need to work on are the details of this financial restructuring that needs to be done.

For our lenders, of course they must go through their due process, credit committees, projection of income and others.

We worked with the banks to grow to where we are now. So now, times are tough and we are asking them to help us reduce the burden.

The intent is for disposals to help us in raising working capital. How much we can keep from the asset divestments is a discussion we need to have with the banks.

We are looking to raise about RM1.5bil to RM1.8bil in proper working capital.

One of the most important parts of the ecosystem is to be able to go and assure our vendors that they are going to get paid. Then they can continue working with us for the future.

If we are able to raise cash, a significant portion will be used to pay vendors.

If we can’t assure the vendors that we can pay them, then it will be very difficult for us to be sustainable.

It is in the interest of our lenders, vendors and shareholders and our clients that we become sustainable beyond FY23.

When do you expect to complete this debt restructuring?

The faster we can complete it, the better. I’m optimistic that we are heading in the right direction.

Are you going to sell some of your assets?

The objective is to get back to sustainability, reduce the debt burden, ensure we can pay past dues to our vendors, generate enough margin and raise working capital to fund future projects. Divestments will help us do that. We have a wide swathe of businesses within our group. Our activities range from exploration and production, engineering and construction, operations and maintenance, and drilling.

We were even managing the point-of-sale systems at Petronas Dagangan petrol stations. The idea now is to review our wide range of businesses and focus on what we are best at. We can’t be everything.

What’s certain is that we will continue to be in energy services. We will remain an engineering and construction company. We also see drilling as a very good business to be part of, especially at this time.