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This article first appeared in The Edge Malaysia Weekly on December 3, 2018 - December 9, 2018

LAST week, Sapura Energy Bhd announced that its units — Sapura Fabrication Sdn Bhd and Sapura Saudi Arabia — had been selected by the Saudi Arabian Oil Company (Saudi Aramco) for its long-term agreement (LTA) programme. While details of the LTA and its impact on Sapura Energy were not disclosed, Sapura president and CEO Tan Sri Shahril Shamsuddin, spent some time with The Edge talking about the LTA and the company’s outlook.

 

The Edge: So what does this LTA mean to Sapura Energy?

Tan Sri Shahril Shamsuddin: It’s a validation of the competitiveness and technical capability of the company. Because without the technical capabilities of a very, very high standard that is required by Saudi Aramco, we wouldn’t even have been selected as part of the LTA … Saudi Aramco is a very discerning and knowledgeable customer. It is a very good customer to have in our portfolio.

 

So this validation opens the door for you to bid for work with them?

Yes, not anyone can bid. There are only a few LTA contractors —McDermott, Saipem, NPCC (National Petroleum Construction Co), Subsea 7, L&T (Larsen & Toubro), among others.

For the group, it’s an acknowledgement of our capabilities, technical capabilities and value to the industry as a contractor. It took us five years to get here.

 

What sort of impact would it have on your bottom line?

You have to wait some time.

 

It enables you to bid for work with them … is that accurate?

It’s a certification of our project management capabilities … that our people have the experience to carry out this kind of work. A certification of the assets that we have in order to execute the work, and our ability in engineering.

 

So, before this, you had no work with Saudi Aramco?

No. We needed to build a track record in order to give confidence that we are a global-grade offshore oil and gas contractor.

 

So you see a substantial amount of work coming from Saudi Aramco in the future?

Today, the Middle East, Africa and Europe is still pretty small — our order book is only RM500 million. So, for sure, relative to the other areas, the growth will come from this area as it is coming from a lower base. [In the] Americas, we have already RM8 billion in our order book. The Middle East will, in a nutshell, open up a huge market for us, and we will grow our engineering capabilities so that we will have very high content capabilities there.

We are putting in a lot of effort and infrastructure. It’s not infrastructure as in capex (capital expenditure). We are fully invested in the capex that we have. We have modifications to do and other such stuff, but the infrastructure I am talking about is the people, the content part, the engineering part … that is where the investments will be, hiring the right people for this opportunity.

 

It’s a huge market, US$150 billion.

It’s a massive market. Actually, it puts a new perspective on how big this industry is, but not everyone in the region can address this market because they do not have the organisation, technology, processes and reach.

And, for the most part, people are not really familiar with the oil and gas sector. People always have a broad brush for the industry. This is the way financial markets are.

There is not yet that maturity to separate the international players from just the local players, or a regional player from a local player. Oil and gas is just oil and gas, but the truth is not all oil and gas companies are the same in terms of capability, engineering and being able to bid for sophisticated customers in the region.

We are about growing markets now. We have graduated from a regional market, we were only half of the globe before. Now we are opening up, and we are using the same assets. So, relatively speaking, we don’t have to make any more investments in terms of our vessels, cranes or ROVs (remotely operated vehicles). It’s all done. It’s about redeploying the assets, and the more work we have, the more utilisation we will have with our assets and the more Ebitda (earnings before interest, tax, depreciation and amortisation) and profitability we will have from our business.

A lot of companies did not do well in the last three years because there were just not enough jobs. When there are not enough jobs, there is not enough utilisation for the investments that they have made, which translate into lower margins or a loss.

So, the strategy is to open up the market. Make sure our turnover is high, so our utilisation will go up over the years and then we will increase our Ebitda and Patami (profit after tax and minority interest).

 

You seem to say that Sapura Energy is not understood as a company.

Yes, in this region, there is no other company like us. If you look at the top five companies in the LTA, for example, they are all Northern European companies and one American company. We are the only one from Asia, other than the Chinese, but having said that, we have been selected, which means that we are just as good as them.

What is it about the group that is systemically risky?

 

So how big is this deal with Saudi Aramco going to be?

Well it depends. It could be bigger than Brazil.

 

Why is it that when Sapura Energy announces a big job, there is little excitement?

I cannot answer that question. I don’t know, maybe there is a lack of understanding and appreciation of the company and the industry. We have been in a difficult situation for three years, so changing three years of conditioning is going to take some time. And to change it, we must show results.

I think once we start showing results in the next couple of years, only then will the mindset change.

 

As clichéd as it is, I have to ask you this question. Is the worst over?

You need to look at it in context, of the industry over the past three years. It just fell off the cliff, from US$100 (per barrel of oil) to something like US$35 (per barrel). There has never been such a prolonged downturn.

This is a company that can legitimately address a global market. You asked me in your email if we have bitten off more than we can chew. How can it be when our utilisation is still low? How can it be when we are still winning work?

We have been doing this for 21 years. The competence was obtained block by block. Right now, the market is just looking at what we spent, and not at what we are turning [into]. We need to focus on the turnover of the company as the debt is being addressed.

We spent on huge vessels to execute high-value work. We borrowed money to buy Sapura Upstream Sdn Bhd but that has given us returns of 100%. The only laggard now is drilling … but watch drilling come up in the next couple of years.

It’s not like we bought things that didn’t enable us to turn over. It’s just that the industry went through a bad patch. Now, we are still alive and things are picking up.

No one can see our capability. We don’t have a racing car or an aeroplane. What we have are assets that nobody sees. They are out in the ocean. Each time you need to do a lift, you know how many engineering calculations should be done? How much the finance has to match the cash flow to completion of projects, how much money you need to raise in order to do the procurement? It’s an integration of different disciplines.

 

While your outlook may look good, your share price doesn’t.

We saw what happened with SapuraCrest (Petroleum Bhd) — how long it went for 30 sen, 40 sen and 50 sen, then it shot up. What will happen is someone out there is going to say this (company) is very cheap … someone who understands. And someone who understands in Malaysia now is PNB (Permodalan Nasional Bhd).

 

 

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