KUALA LUMPUR (Sept 24): A corruption investigation into Sapura Energy Bhd’s participation in a US$2.7 billion contract award with Brazil's state-owned Petrobas amidst the group’s ailing finances raises concerns on its prospects, which could further impact its already low share price, said AmInvestment Bank.
Sapura Energy and its joint venture (JV) partner Seadrill Ltd have been put under investigation by Brazilian and Dutch police as part of a corruption probe into three contracts worth US$2.7 billion signed between Sapura Energy and oil firm Petrobras in 2011, Reuters reported yesterday.
According to Reuters, prosecutors described an alleged scheme in which Sapura Energy allegedly paid bribes worth 1.5% of the contracts it won with Petrobras, adding that some of that bribe money appeared to have made its way back to two "high-ranking" Sapura Energy executives in Malaysia, without providing names.
“This accounts for an estimated RM166 million [or] 57% of Sapura Energy’s FY21 loss,” AmInvestment Bank senior analyst Alex Goh wrote in a note today.
The contracts, which are for the construction and charter of three pipe-laying support vessels, known as PLSVs, are still in effect today. The first charter or contract has been delivered, while the second one with a remaining orderbook of RM3.8 billion is still underway.
Yet while the second charter is still expected to be undertaken by the JV partners, there is a likelihood of substantive penalties if the authorities are able to prove the corruption cases, Goh noted.
“Amid these worrisome legal issues, the group’s huge debt of RM10 billion still needs to be refinanced with 14 banks by December 2020, which could mean additional equity-raising exercise in the pipeline that will translate to massive dilution given the current low share price,” he said.
Interestingly, there was a muted response to the group’s share price this morning as the stock remained unchanged at 11 sen. Goh said given the corruption investigation amid prospects of further losses in the coming quarters, the stock currently trades at a low 0.2 times of its price book value.
Permodalan Nasional Bhd (PNB) holds a controlling stake in the oil and gas company with a more than 30% share, with the group's president and chief executive officer Tan Sri Shahril Shamsuddin as its second largest with about a 13% stake.
Shahril recently announced that he would be retiring from the post next year in March 2021, and has appointed Datuk Mohd Anuar Taib as its CEO designate effective next month as part of a six-month transition.
Although Sapura Energy registered an improvement in the first half of the financial year ending Jan 31, 2021 (1HFY21), Goh remains cautious of any potential cost provisions and asset impairments by 4QFY21 given that Petronas had registered a loss of RM18 billion in 1HFY20, together with other oil majors.
For the first six months ended July 31, it reported a cumulative net profit of RM37.95 million versus a net loss of RM225.41 million, on the back of revenue of RM2.58 billion versus RM3.56 billion a year ago.
He noted that Sapura Energy’s JV contributed an estimated pre-tax profit of RM123 million (US$30 million) in 1HFY21 versus a group pre-tax profit of RM90 million, which includes contract adjustments and variation orders amounting to RM82 million, with all six PLSVs currently being utilised.
Additionally, Goh noted that Sapura Energy’s outstanding orderbook as at 2QFY21 fell 5% on a quarterly basis to RM13.3 billion, noting that recent new wins of RM840 million were insufficient to offset the 2QFY21 depletion of RM1.2 billion.
“Even though the group is bidding for RM29.4 billion of new jobs with additional prospective projects worth RM63 billion, the order book could still decline over the next two quarters as clients are likely to postpone the awards until next year if the current gloomy offshore outlook persists,” he said.
Looking at its cash flow, AmInvestment Bank estimates for Sapura Energy’s net cash flow to hover at RM125 million for FY21, before coming in higher at RM268.5 million in FY22.