Sapura survival depends on debt revamp

CGS-CIMB Research said the cash-strapped oil and gas company’s debt restructuring needs to succeed to avoid a delisting from Bursa Malaysia.

PETALING JAYA: The survival of Sapura Energy Bhd, which returned to the black in the first quarter, hinges on the success of its debt restructuring plan that could prove to be a massive challenge, according to analysts.

CGS-CIMB Research said the cash-strapped oil and gas company’s debt restructuring needs to succeed to avoid a delisting from Bursa Malaysia.

The company was classified as PN17 under Bursa Malaysia’s rules due to material uncertainty in relation to its financial year 2022 (FY22) financial accounts.

As at April 30, 2022, its shareholders’ equity of RM157mil remained below the critical threshold of RM5.4bil, being 50% of its paid-up share capital.

“Hence the success of the company’s debt restructuring is critical to avoid a delisting. Upside risks include the company securing new sources of equity and successful debt-to-equity swap exercises.”

Sapura Energy posted earnings of RM91.9mil in the first quarter ended April 30 (1Q23) as compared with a net loss of RM97mil in the same period a year ago.

This was achieved after booking a net forex gain of RM175.91mil in the period as compared to a net forex loss of RM42.69mil in the same quarter a year ago.

Despite the sequentially-better results, it said many challenges remain, with legacy loss-making contracts to make up between one-quarter and one-third of the estimated FY23 revenues.

This also extends into FY24 with respect to the troubled central processing platform fabrication contract for India’s state-owned Oil and Natural Gas Corp’s 98/2 project.

Its engineering and construction (E&C) assets remain poorly utilised up to end-April 2022, with the Lumut fabrication yard utilisation at only 31% and the key E&C offshore vessels only 25% utilised.

CGS-CIMB, which is maintaining its “reduce” call on the stock, said there is still hope with Sapura Energy’s recent announcement that it had won RM2.7bil in new contracts, comprising a mix of E&C and drilling jobs.

At the same time, it is cautious in the company’s new contracting strategy, by including commodity price pass-through clauses.

Meanwhile, Maybank Investment Bank Research (Maybank IB) said it expects Sapura Energy to be in the red in FY23.

“While its operational and financial restructuring exercises are currently underway, turning around as a PN17 status company will be a massive challenge and will take a considerable time.

“The need to divest, monetise its assets and businesses (of more than RM300mil) is inevitable. Sapura Energy needs to re-base its cost structure to a much lower level still. Its debt restructuring is underway,” it added.

Hong Leong Investment Bank (HLIB) Research, which is maintaining its “sell” call on the stock with a target price of RM0.01, said it would be an uphill task for the company to turn around its operations in the near-to-medium term due to several factors.

These include the heightened cost overruns in its projects, liquidity issues from difficulties to obtain funding due to its balance sheet distress (due to its PN17 company status), job delivery and execution risks and inability to win jobs due to its challenged balance sheet.

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