This article first appeared in The Edge Malaysia Weekly on June 21, 2021 - June 27, 2021

ALMOST every year for the past few years, The Edge would have an interview with Malaysian oil and gas (O&G) giant Sapura Energy Bhd, and the interview would hinge on whether the worst is over for the company, whether there is light at the end of the tunnel, or whether Sapura Energy will regain at least some of its lost glory.

Recently, the interview with Sapura Energy was held once again, but this time around, it was markedly different. Fielding questions at the interview was Datuk Anuar Taib, non-independent executive director and CEO of Sapura Energy.

Anuar will have helmed Sapura Energy as CEO for three months on June 23. He took over from Tan Sri Shahril Shamsudin, who retired after leading Sapura Energy and its predecessor, Sapura Crest Petroleum, since July 2003.

At the outset of the interview, it is apparent that Anuar is very different from Shahril in terms of leadership style. The key question, however, is, will the change at the helm translate into better results at Sapura Energy?

On Shahril’s passing the baton to him, Anuar has this to say: “I have big shoes to fill. It is a privilege to be able to take over from him. He has built this company into what it is today.”

Anuar is not new to the O&G industry. He joined Sapura Energy as an independent director in August 2020 before being named chief operating officer and CEO designate in October 2020. Prior to joining Sapura Energy, he was the chairman of Shell companies in Malaysia and an executive vice-president and CEO of national oil company Petroliam Nasional Bhd’s (Petronas) upstream business. In short, he has had a good 30 years in the industry.

Many are optimistic that he will turn things around at Sapura Energy.

In a report released after the company’s financial results in April, CGS-CIMB Research, in endorsing Anuar’s appointment, said, “We expect veteran Anuar (ex-Shell and ex-Petronas), who took over as group CEO from March 23, 2021, to improve Sapura Energy’s operating and financial performance over time.”

While the Sapura Energy of today is a RM2.16 billion market capitalisation company at its close of 13.5 sen last Thursday, in its heyday, in early April of 2014, the company’s market value was a staggering RM28.5 billion, making it the second largest integrated O&G service provider in the world, ahead of French giant Technip SA, and only behind Italy’s Saipem SpA.

For its year ended January 2014, SapuraKencana registered a net profit of almost RM1.1 billion from RM8.4 billion in revenue, translating into earnings per share (EPS) of 18.2 sen. In stark contrast, for its financial year ended January 2021, Sapura Energy suffered a net loss of RM160.87 million from RM5.35 billion in revenue.

A concern has been its high debt levels. As at end-January this year, Sapura Energy had cash and cash equivalents of RM488.97 million while its long-term debt commitments were pegged at RM7.07 billion and short-term borrowings (due in 12 months) stood at RM3.26 billion. The company’s finance cost for the year ended January 2021 was a high RM492.36 million, albeit down from RM664.56 million a year ago.

To put things in perspective, Sapura Energy had accumulated losses of RM4.62 billion as at end-January this year (see “Sapura Energy has its work cut out” on Page 68).

A CEO of a publicly traded O&G company says it is timely for Anuar to take over the reins. “Sapura Energy needed a different type of CEO — someone like Shahril — to grow it when it was a small entity. You needed aggression back then … Now, it’s a different situation; it (Sapura Energy) is at a different stage of its life, so you need a different pair of hands to lead the company. In my opinion, Tan Sri Shamsul (Azhar Abbas, ex-Petronas CEO and currently Sapura Energy’s chairman, who was appointed in July 2020) and Anuar are the right combination to lead Sapura Energy and revive the company,” he says.

But there are issues to be addressed.

Just before Anuar became CEO, the company dealt with some of its debt woes.

In February 2021, Sapura Energy obtained a facility of up to RM700 million from Maybank for working capital purposes. Together with a US$135 million (around RM540 million) facility from CIMB secured in November 2019, Sapura Energy now has RM1.2 billion for working capital purposes.

Then, in late March this year, Sapura Energy executed multi-currency financing facility agreements — resulting in its drawing down on term loan facilities of US$602.1 million and RM906 million — and issuing sukuk of RM6.38 billion and US$124.5 million.

The refinancing exercise was completed at end-March this year and subsequently, Sapura Energy’s short-term borrowings of RM3.1 billion were reclassified as long-term borrowings.

Anuar says, “We have restructured the debt, to make it into a seven-year debt, of which we have 2½ years’, or 30 months’, worth of exclusion from paying the premium. So that gives us a bit of headroom, and then we were also able to raise about RM1.2 billion worth of project financing facilities.

“To restructure the RM10 billion worth of loans with 10 banks is significant, almost a vote of confidence in us from them …  At the end of the day, it boils down to just meeting them, sharing with them your plans, fundamental deliveries, and opportunities and risk management. That (the refinancing) done, we have secured a breather, so now we have to go out and make sure they trust us to continue to be with us. That’s what we are trying to do through delivery,” he explains.

Perhaps it is comforting to the banks that Sapura Energy’s largest shareholder since January 2019 has been state-controlled unit trust fund manager Permodalan Nasional Bhd (PNB), which via its various funds has close to 40% equity interest in the O&G company.

To recap, PNB’s 40% shareholding came about after Sapura Energy raised RM4 billion in a cash call — RM3 billion from a five-for-three renounceable rights issue at 30 sen, and RM1 billion via a two-for-five renounceable rights issue of new Islamic redeemable convertible preference shares at 41 sen each. In total, PNB forked out RM2.68 billion in early 2019.

Considering that Sapura Energy’s stock closed at 13.5 sen a share, PNB is sitting on a relatively huge paper loss.

Other than being a PNB company, much of Sapura Energy’s debts are also asset-backed.

As at end-January, the company had total assets of RM22.69 billion, and its net asset per share stood at 56 sen, more than four times its close of 13.5 sen last Thursday.

Other than a fleet of six derrick lay vessels and barges, six pile-laying barges, 41 remotely operated vessels and three fabrication yards (two major and one minor), Sapura Energy has several other large assets, acquired over the years.

In 2014, Sapura Energy acquired its first offshore production asset, taking over Newfield Exploration Co for US$898 million. Although some quarters said the price tag was high, in 2018 it sold a 50% stake in the same exploration and production company to Austria’s OMV Aktiengesellschaft for US$975 million.

Also in 2014, Sapura Energy positioned itself as the largest tender rig operator following a US$2.9 billion acquisition from Norway’s Seadrill Ltd, which at one time was a substantial shareholder of Sapura Energy before oil prices tumbled.

There is a possibility that Sapura Energy will divest some of these assets deemed non-core.

On the likelihood of the company selling its assets, Anuar says, “Basically, we can’t be the best in everything. So, the way I look at it, at the things that we ­really need to be good at, we must be very good — better than everybody else so that we can be competitive.

“But there are areas that we will say we are not going to invest in. Therefore, we start looking at what to do with this kind of portfolio and assets. We think by about 2023 or so, we [will undergo] what we call a portfolio evolution. We will start looking at the portfolio that we have; even today we are reviewing all of our assets and some of our businesses. Are those better off with us or would they be better off with someone else who would want to invest in them even more?”

With Brent crude prices strengthening — gaining more than 84% over the past 12 months to currently trade at the US$72 per barrel band — the outlook for O&G players, Sapura Energy included, seems better.

In a report released earlier this month, investment bank Goldman Sachs said it forecast Brent crude prices reaching US$80 per barrel as Covid-19 vaccination boosts economic activity and increases demand for oil. Goldman Sachs had global demand for oil at 99 million barrels per day (mb/d) in August, up from 96.5 mb/d currently.

If Goldman Sachs’ forecast is accurate, is Sapura Energy at 13.5 sen per share worth looking at?

The Edge asks Anuar if he thinks Sapura Energy at 13.5 sen per share is undervalued. “Definitely,” he says, but does not peg a fair value on the company’s stock.

“I am not going to get into that game; I leave the conjecture to the market,” he comments.

Besides Anuar and chairman Shamsul, Sapura Energy has also appointed Datuk Iain Lo as an independent non-executive director and Bernard di Tullio as a non-independent non-executive director.

Lo, who recently retired as chairman of Shell Malaysia, has more than 30 years’ experience in exploration and production, while Di Tullio was president and chief operating officer of Technip Group from 2005 to 2011, in a career spanning 39 years.

With these new appointments, and with Anuar steering Sapura Energy, the company’s prospects seem better.

Anuar says, “The outlook for Sapura Energy is actually quite positive. Today, the order book remains at about RM13.7 billion. We believe our revenue for this year, FY2022, will be more than that in FY2021, and we have actually secured about 80% of the revenue [targeted] for 2022.”

Sapura Energy’s tender book meanwhile stands at an impressive RM31.5 billion, while the addressable market is RM123 billion. Over the past five years, Sapura Energy has had a fluid hit rate averaging 17%.

However, some of the analysts who cover Sapura Energy are cautious. For instance, CGS-CIMB Research in its report at end-April says, “Sapura Energy reported a core net loss of RM242 million in 4QFY2021, which was much wider than the core losses of the preceding quarters. On a full-year basis, Sapura Energy reported its fourth consecutive annual loss in FY2021. In short, FY2021 was another poor year for Sapura Energy, and the underlying reality was likely weaker than reported in its financial statements.”

CGS-CIMB Research upgraded Sapura Energy to a “hold” from “reduce” previously, and increased its target price to 14.5 sen from 13 sen. The research house forecasts Sapura Energy chalking up net profit of RM60 million from RM6.57 billion in revenue for FY2022.

Anuar gives his reason for being optimistic. “What we’ve done is diversify our footprint. Prior to the downturn, we were very much a Malaysian-Asia-Pacific player. What we’ve done through that downturn period was to qualify ourselves with new customers in new geographies.

“Every region will have its own peculiarities, in terms of capacity and demand, [so] you will be able to command different margins for different scopes and geographies. We feel the combination of us continuously striving to do better and having that spread across multiple geographies and clients, gives us that ability to manage any progressions on any particular market or sector,” he says.

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