Cover Story: ‘I have no issues with the EPF … it is their right to do what they want’

This article first appeared in The Edge Malaysia Weekly, on July 23, 2018 - July 29, 2018.
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TAN Sri Shahril Shamsuddin, the president and CEO of Sapura Energy Bhd, was in a lively mood when met at his office last week.

The annual general meeting, he says, was “disappointing” but he is unperturbed, with a lot to do. The Employees Provident Fund (EPF) and Minority Shareholders Watch Group (MSWG) opposed some of the company’s resolutions and made public their displeasure. But how much of an impact will that have on the direction of the company?

In an interview with The Edge, Shahril shares some of his thoughts on the outlook for the company, and what transpired at the AGM. Here is an excerpt from the interview.

 

The Edge: Are the local institutions selling your stock?

Tan Sri Shahril Shamsuddin: But the foreign institutions are buying … Usually we won’t have this issue. Look at my board — Tan Sri Hamid Bugo, MACC (Malaysian Anti-Corruption Commission) adviser, state secretary of Sarawak, chairman of Petros (Petroleum Sarawak Bhd) — we have people of impeccable standing.

(Mohamed) Rashdi (Mohamed Ghazalli), risk, at PwC; Gee Siew Yong — everyone knows the government puts her everywhere as she is a smart cookie; Datuk Muhamad Noor Hamid, he is a gas expert…

The share price went from RM1.50 to 40 sen … what do you want the management to do? You can take the capitalist route, which I totally respect. Capitalist shareholders will say, okay … lose money, understand the environment, sell your shares and walk, but don’t talk bad about the company.

 

Aren’t you concerned about shareholders selling shares?

I am totally fine with that. It’s your right, it’s your money.

 

It was asked if profits were to pick up, would your salary rise as well?

He (the EPF representative) is a shareholder, so he has a right to whack me, but it’s all conjecture. But when we were making RM1.8 billion, my salary was the same.

 

There were questions as to why you are being compensated when you have not sold any shares.

If I sold the shares, it (the share price) would be at 10 sen.

 

Could it be that shareholders are upset that though the share price has fallen and they have suffered losses, you are still getting the same pay?

But who caused the share price to fall? When there are more sellers than buyers, the share price will fall.

 

How much do you think it (the share price) would be if not for the heavy selling?

At least 10% to 20% above net book value. (Sapura Energy’s net asset per share as at end-April was RM1.58.)

 

Do you think the massive impairments gave a bad surprise to shareholders last year? If I remember correctly, there were two rounds of impairments. The first caused the share price to fall to about RM1, then the second caused it to fall to below RM1.

No … the selling caused the share price to fall. If you say it’s because of the impairments, it would be below 60 sen now. It actually went up after the impairments.

You see, impairment is a discipline the management must have, and it’s a rule — you have to mark to market … although I know in two years, things will pick up. I could have used all the technical arguments against writing off. But I have to err on the side of prudence.

 

Actually, Sapura Energy’s impairments came later when compared with others in the industry. Why?

We couldn’t (do them earlier) because we still had contracts. I actually wanted to do them earlier. The first impairment involved our oil assets; the second, our service rigs and vessels.

The rigs and vessels had long-term contracts that did not really end. And they could not obtain new contracts, so we impaired them.

Secondly, rates were already coming down. A chunk of the vessel cost will be depreciation. When I write off, the depreciable amount will shrink, which means I will be more profitable at a lower rate for the coming contracts.

We took the conservative position. It’s going to be down for longer. We wanted to be more competitive, therefore we argued with the auditors, we wanted to cut.

 

Have you had any issues with the EPF?

I have no issues with the EPF. It is their own assessment, their own valuation, their right to do what they want.

We brief them twice a year, and we explain everything (including remuneration packages) … (we tell) all the major shareholders every quarter the strategy.

 

You have an upcoming IPO (initial public offering). Does the EPF’s reaction at the AGM worry you?

No, it’s a story of there being more buyers than shares to sell.

 

Tan Sri, some people have asked how much more you are paid compared to (Tan Sri) Wan Zulkiflee (Wan Ariffin), Petronas’ president and CEO.

Wan Zul sits in a company that has the right to the oil in Malaysia. I have to go and find and pay for it, I have to risk it. Wan Zul is a dear friend of mine. One is an entrepreneur … you cannot compare an entrepreneur to the CEO of an institution that has skin in the game.

 

Is your operating environment still as difficult?

This is the result of work for the past three years. We can address Southeast Asia, India … we can address Australia, we can address Caspian, we can get Mexico, Brazil, East and West Africa. From just RM38 billion, we have grown to a market opportunity of RM350 billion.

This RM350 billion is the market we can look at now, but could not look at before.

In order to achieve this, we had to do structural changes, we had to change our processes, we had to expand, develop global centres, put in systems — all the things that needed to be done, all these were KPIs (key performance indicators) along the way.

You cannot just say, ‘I want to go there’, without putting in the logistics, the processes. It’s a lot like going to war — you need to strategise and be very clear on the route you want to (use to) attack the market.

We decided we had to increase our top line. In order to increase our top line, we had to increase our footprint. To do the footprint, we needed to continue to develop the platform and the architecture.

The board conditions the management to do the right thing.

 

So what did you do?

We had our traditional markets, but the board said we could not go on giving the same ones (markets), so we won an EPC (engineering, procurement and construction) contract. Then, in the US … in the US, we can do fundamental design in pipeline construction. That is the very top end of engineering, a company called Peritus.

We used that company for the design portion, to bid in Romania for a US$1.5 billion contract.

Other evidence — in the Middle East, we said we would take (jobs). This year, we won something there. We won a US$4 billion bid in Saudi — two contracts.

In the Middle East, to win, you have to go through a process. In that process, we have had to bid against five giants — McDermott, LNT, Technip, Saipem, Subsea Seven. They value you on, judge you on engineering capabilities, fabrication capabilities, installation capabilities, and project management track record.

In Saudi (Arabia), Marjan, there are some jobs where only four (companies) are invited, and we are one of them … US$800 million. We were invited … Those are the kinds of things we have done to qualify ourselves, to get access to this market.

If you look at the Romanian tender, you are only allowed to bid after a technical evaluation. We are in the top three — Eni, Technip and ourselves. Now, we have to go for an interview and scrutiny in the US at the head office of Exxon … a 50% shareholder with OMV … We have already penetrated Europe.

This is what we have done. Others have been shrinking over the past three years but we have expanded.

In 2017, we only had RM2.5 billion in bids for the year. In 2018, at this time, we are already at RM5.8 billion. If we get all our prospects, there is another RM8.2 billion, which is about RM14 billion already. We won’t win it all but we will be back to pre-collapse levels. (Sapura Energy’s current order book stands at RM16.7 billion.)

If I said three years ago I wanted to build a global company, who would have believed me?

 

There is talk that your pay, your compensation for the covenant should be reflected differently in your annual report. And it should not be part of your remuneration package.

I don’t know these things, I am straight. My board is very strict and transparent. But a bank guarantee for RM16 billion at 1% is RM160 million … so was the board out of line?

 

On the listing of your exploration and production (E&P) business, there is a question on the prospects of the parent company after carving out a choice asset.

There’s a RM16 billion order book but mainly in E&C (engineering and construction), but we will have a chunk in an E&P company but the debt comes down.

 

There are quite a few companies you could list, right?

Yes. My biggest problem now is (high) debts. When I reduce my debts, (more) revenue will go straight to my bottom line.

 

There are two things that shareholders would like to know — the impairment cycle and likelihood of a cash call.

This is up to you to interpret. A cash call is always an option.

 

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