Sapura Energy ‘in a good place now’

Anuar: The company’s debt restructuring is another two quarters away from completion.

THE true test of a business’ resilience lies in how it deals with its lows.

Sapura Energy Bhd, once a prominent player in the oil and gas (O&G) sector, is no exception.

The industry downturn in 2015, compounded by the Covid-19 pandemic, pushed Sapura Energy’s debt levels to unsustainable heights.

This left Sapura Energy in a dire situation, with payments to creditors delayed, vessels at risk of arrest and winding-up petitions looming.

Group chief executive officer (CEO) Datuk Mohd Anuar Taib says the usual three-year down cycle of the O&G industry was prolonged by the pandemic.

He explains that Sapura Energy was particularly vulnerable with its idle assets and contracts offering low margins and misaligned cash flows.

“In the past, we took contracts with lower margins and cash flows that didn’t align with our risk profile,” he tells StarBiz 7 during a discussion on what led to the decline of Sapura Energy.

By 2021, the group’s financial woes were apparent, with net cash plunging to below RM500mil from above RM1bil (see chart).

“As a PN17 company, I do not have bank guarantee loans. We do not have working capital. We need RM400mil to RM500mil as working capital just to run the business,” says Anuar who has over 30 years of experience in the industry.

With over RM10bil owed to banks and RM1.5bil to vendors now, Anuar says the group would need to channel RM800mil annually in interest alone.

However, in March 2022, Sapura Energy secured a lifeline via a restraining order to restructure its obligations.

This legal protection not only marked the beginning of its debt restructuring process, but also provided exemptions from interest payments during the restructuring, allowing the company to focus on stabilising operations.

Fixing the balance sheet

When Anuar joined Sapura Energy as chief operating officer in October 2020, during the height of the Covid-19 pandemic, the company was already grappling with financial difficulties.

His immediate focus upon becoming CEO in March 2021 was clear – fixing the balance sheet, without disregarding the need to build an innovation culture despite the tough times.

“Without a good balance sheet, I can’t tender in the future. We have to address the unsustainable debt,” the former chairman of Shell Malaysia says.

Anuar was also formerly the CEO of PETRONAS Carigali Sdn Bhd.

As it was not viable to negotiate with lenders on a one-to-one basis, Anuar says the group also worked with the Corporate Debt Restructuring Committee (CDRC).

Anuar says the company’s debt restructuring is “another two quarters away” from completion. “Maybe some time in the middle of next year or so, we should be able to complete it and fix the balance sheet.”

Central to the recovery plan is the scheme of arrangement (SOA), which must be approved by the court.

Anuar says the SOA will prioritise critical stakeholders, especially Malaysian vendors, many of which are SMEs.

“The vendors will be paid in full. The intention is for critical Malaysian vendors to be paid in full – about a billion-plus, with no haircut,” Anuar notes. “If you don’t pay vendors, they won’t want to work with you, and then we can’t progress. We need to value people who have been with us through good and bad times.”

Once the SOA is approved, Sapura Energy will reach the restructuring effective date, which Anuar targets for mid-2025.

“That is the point where the terms agreed upon will start,” he says, adding that RM1.1bil will be paid to local vendors particularly.

When asked how the company will finance its debt repayments, Anuar highlights the involvement of a white knight investor.

While the white knight has yet to publicly emerge, he says their commitment letter has been filed through the court and the CDRC.

Beyond debt repayment, Anuar says the company is also addressing contingent liabilities, such as arbitration and litigation stemming from incomplete projects, to pave the way for long-term sustainability.

Paring down debt

At the peak in January 2017, Sapura Energy’s debt was over RM18.65bil, but it had been reduced to RM10.97bil as at July 31, 2024.

To address this, in the financial year ended Jan 31, 2019 (FY19), Sapura Energy raised RM7.6bil through the 50% divestment of its exploration and production (E&P) arm, Sapura Upstream Assets Sdn Bhd. The proceeds were largely allocated to debt reduction, lowering the company’s net gearing ratio from 1.6 times to 0.6 times.

More recently, the group is exiting the E&P business entirely through a proposed disposal of its remaining 50% stake in SapuraOMV Upstream Sdn Bhd, which is owned by Sapura Upstream Assets Sdn Bhd, to TotalEnergies Holdings SAS for US$705.3mil – comprising US$530.3mil in cash and US$175mil in debt relief – with proceeds earmarked to further pare down borrowings.

Even after this divestment, Anuar says the group has “a lot more negotiation to make sure that we pare debt to a sustainable level”.

When asked about the exit from E&P, Anuar explains: “The business of E&P is such that you have to put in huge capex, and then afterwards you’ve got to wait to get it paid. From our perspective, while value has been added, we wouldn’t see cash flow until 2028 or so. So, we looked at the calculation, and it was better to divest so we can bring in cash and pay down debt.”

He also notes that the timing of the divestment aligned with their partner OMV’s plans to exit the business.

“Having another supermajor (TotalEnergies) coming into Malaysia, bringing investment is good for Malaysia. This transaction allows us to reduce debt and benefits both Sapura Energy and the country,” he says.

He says the divestments of SapuraOMV will further enable Sapura Energy to stabilise operations, strengthen its balance sheet and position itself for long-term sustainability.

Operational efficiencies

Anuar believes that the company right now is “in a good place”.

“We’ve moved from RM400mil to RM500mil net cash to about RM1.7bil, primarily through self-generation,” Anuar notes.

On the organisation side, Anuar highlights that Sapura Energy has undergone significant changes to address inefficiencies in its structure.

One major effort has been the consolidation of the group’s sprawling structure.

“We had 192 companies, including 23 operating entities, each with a different role. The first step was consolidating and streamlining these operations to ensure clarity and efficiency,” Anuar explains.

He points out that its operations were profitable, despite the limited working capital that was hindering growth. Evidently, its free cash flow in the first half ended July 31, 2024 (1H25) stood at RM275mil, while for FY24, the group reported a free cash flow of close to RM700mil.

This is on the back of a revenue of about RM4bil to RM5bil range over the past few fiscal years (see chart).

Anuar also says that Sapura Energy’s turnaround required a disciplined approach to risk management and contract renegotiation.

“We had to stop taking too much risk and avoid compounding losses. A critical step was renegotiating what I call legacy contracts – those awarded in 2019 and 2020 – to avoid bleeding,” he explains.

Traditionally, the company relied on its own cash for working capital, completed the work, and then claimed payments from clients. However, with limited liquidity, this approach had to change, Anuar says.

“We had to reverse the flow. Now, we convince clients to pay us upfront, assuring them that we’ll complete the work without delays. It’s about building trust and adjusting to our current reality,” he says.

Traditionally, Anuar says Sapura Energy’s operations involved centralising its fleet in Malaysia and bidding for projects globally.

“Whenever we won, we sent the vessel. But the way contracts were structured, we wouldn’t get paid until the vessel reached the project site,” Anuar explains.

“Instead of bidding everywhere, we now aim to place vessels in key regions and stay as much as possible within those areas. This reduces idle time and increases efficiency.”

Despite the efforts, current vessel utilisation remains a challenge. “This year hasn’t been great. Utilisation rates for some of our assets, such as the Sapura 3500, Sapura 900 and Sapura 1200, are below 50%,” Anuar says.

However, he remains optimistic about improvement.

“With the changes we’re implementing, we believe that by next year, utilisation rates will exceed 60%,” he adds.

Anuar also highlights the need for caution in taking on new projects. “Right now, our appetite is for projects with a value as low as US$10mil and up to US$300mil, max US$500mil, partly because we don’t have a bank guarantee,” he notes.

Typically, he says working capital for such projects accounts for about 15% of their value.

“Given our current financial position, we have to be selective and ensure the projects align with our risk profile and margins,” he says.

The focus remains on efficiency rather than price hikes.

“It’s not about jacking up prices. It’s about finding ways to make ourselves more efficient.

“We must be bidding for projects with the right level of risk and margin. So that when we win, we have something to win. Our operational mantra is ‘bid right, execute with discipline’,” Anuar says.

Sapura Energy reported a revenue of RM2.3bil for 1H25, with 61% coming from overseas markets. The group’s order book comprises RM5.9bil in wholly-owned projects and RM6.1bil from its 50:50 joint venture in Brazil. Its bid book stands at RM18.6bil, with a win rate of 33%.

While consolidating operations in Malaysia might appear safer, Anuar emphasises the need to diversify risks across countries and clients. “In reality, for sustainability, we’ve had to diversify beyond Malaysia, even over the past three years,” he says.

Anuar says the Brazil joint venture, Seabras Sapura – a collaboration with Seadrill – remains a cornerstone of the company’s survival strategy.

Additionally, Sapura Energy is building a long-term presence in Angola, with the Sapura 3500 vessel among its assets operating in the region.

Looking ahead, the company is aligning its expertise with energy transition opportunities, focusing on two areas – decommissioning and carbon capture and underground storage (CCUS).

“We know we’ve done a good job in decommissioning and now we’re set to grow,” Anuar says.

Earlier this year, Sapura Energy formed a joint venture with Norwegian firm AF Offshore Decom, establishing Kitar Solutions to simplify offshore decommissioning.

Anuar says this partnership leverages on AF Offshore Decom’s over two-decade decommissioning experience in the North Sea, enabling Kitar Solutions to adopt these standards and expand its capabilities across the Asia-Pacific.

The potential for decommissioning in South-East Asia is significant, with over 400 platforms aged more than 40 years, according to Anuar.

In CCUS, Sapura Energy is contributing to the design phase, partnering with Petrofac on a front-end engineering project for the Aramis initiative in the Netherlands. This TotalEnergies and BP-backed project focuses on pipeline development for carbon capture.

After years of financial distress, Anuar says stabilisation is now the company’s priority.

“We aim to exit the PN17 status by next year or early 2026,” Anuar says. “Turning around Sapura Energy is not about dollars and cents. It is about the reality of seeing a Malaysian company remaining relevant in an environment where not many Malaysian firms are present,” he adds.

Sapura Energy’s share price has tumbled 77% since Anuar took over to around 3.5 sen on Nov 21. Year-to-date, the stock is down 36% from a high of 5.5 sen.

Notably, it reached its peak at end-2013 of RM4.70 before the industry downturn.

Only two research brokerages now cover Sapura Energy – UOB Kay Hian Research and BIMB Securites Research – both of which have “buy” calls on the stock, with a target price (TP) of seven and six sen a share, respectively. This gives a consensus 12-month TP of 6.5 sen a share, for a 85.7% potential return.