This article first appeared in The Edge Malaysia Weekly on July 13, 2020 - July 19, 2020

ONE of the most talked about companies on Bursa Malaysia lately has been Sapura Energy Bhd. Not all of the banter has been positive; the company has been criticised for its lack of profitability and the paper losses its controlling shareholder Permodalan Nasional Bhd (PNB) is sitting on. Sapura’s president and CEO Tan Sri Shahril Shamsuddin spoke with The Edge recently on its prospects. Here are excerpts of the interview.

How are things at Sapura?

We have invested RM18 billion in assets in order to address the market. When we look forward, in our analysis — not just our analysis but the analysis of industry experts — there’s about US$300 billion (RM1.28 trillion) worth of work out there from now till 2025, even in the current low price environment.

According to Rystad Energy (an independent research firm on energy), where the spending is going to be from 2022 to 2025, offshore capex alone has a total of US$982 billion, of which US$300 billion can be addressed by Sapura. That is where our expertise is, and where we can perform well. And in order to qualify for the clients, we need to have these strategic assets.

When the oil price crashed [in 2015], we were basically in Southeast Asia. But we had already made the investments to address the global market … What is the alternative for Sapura Energy if we did not open up all those areas?

You are saying your order book will remain high?

We have to win. Our bid book today is RM74 billion. Our order book is RM14 billion. To date, wins have been RM800 million.

1Q profit was RM14 million. How do you see the company performing in the coming quarters?

We have to stay in profit and we are going to be trying very hard to achieve it. How are we going to do it? The reality is, we have to bring down our operating costs. Because we have assumed the oil majors will want to see very competitive bids out there. We are breaking down our processes again, re-engineering it … we [first] did it at the last crash. The competitiveness will continue.

When you see the sell calls on Sapura, how do you feel?

The investors have a choice. And if the investor is short term, they will sell. Because it is only natural, you know, with all the bad news about Opec, low oil prices, Covid-19. And then, there’s the debt issue as well. So if you put them all together, it is only natural. If you take a snapshot of today, the sell calls will come.

What would you peg as a fair value to Sapura stock?

At least the NTA [net tangible assets, of 60 sen per share] because of the assets we have today.

When you have an order book of RM14 billion, what can go wrong? What usually goes wrong for you to actually not make margins?

A lot of things can go wrong. There can be cost overruns, cost by mistake, or cost by clients who pay for [a certain quality] but want [a better job than they are willing to pay for]; there will be a tender process, there is the execution, there are very defined work scopes, but on the ground, the project managers will see that even their own work scopes are actually incomplete. And then they try to force it upon you.

Tan Sri, what are your comments on some analysts saying that you go into projects with very low margins just to secure the project?

Okay, I think that is a fair question and a very important question to answer. Sometimes we are forced by the market to take a lower margin so that we at least have utilisation of the assets … So now you have the decision of whether to walk away or to do [it].

So it is accurate?

We have to have contributions from the assets that we already have in this depressed market. All businesses go through this business cycle, right? We are at the bottom right now. So we have to price for utilisation, at least break even.

We needed to open up markets. And I think any strategic company knows that when you are opening up a market, you have to be aggressive.

Even though [our drilling segment] may be at loss position because of depreciation, it is still giving cash contributions. And when you are sustaining in a low cycle, cash contribution is everything.

Is refinancing [of your debt] adequate? Some have raised concerns about future finance costs for the company.

[It’s] pretty much about the same. We are not going to push. The banks are pushing more because of the perceived risk.

In your market projection, what’s your view on where we are in the cycle?

We are in the flat part of the cycle, about to go up. Again, I go back to the natural decline. Like it or not, the value of the oil company must be the replenishment of their reserves, and their reserves have been declining.

Sooner or later, they must invest. They have no choice. We need to put in 44 million barrels [per day] of new supply to meet demand in 2030. Again, this is from Rystad. New gas supply alone is very high, and we are pretty much a gas-centric company today.

The banks are not jittery?

You have this kind of value in this company [referring to Sapura’s assets and global reach]…

These are terms that were agreed upon some time back, right?

Yes, so this is part of the [refinancing]. But banks being banks, if they can squeeze, they will squeeze.

But they do understand [the difficult situation] right? Do you have any difficulty negotiating with them?

Normal negotiations.

Nothing untoward?

I think there was an issue of guarantee (of loans) that came out. Today, the guarantor of that (Sapura’s loans) is actually me (Sapura Holdings). So when there is a new controlling shareholder coming in, it is only natural for the bank to ask the controlling shareholder to take the guarantee.

Our debt-to-equity ratio is still 1.05 times, which is still pretty low. What we need to improve is our debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio. But that is already to be expected because of the supply-demand shock that resulted in depressed prices which caused us an aberration for the downcycle. But when the cycle continues, this will correct itself.

How much of your order book is going to be executed this year?

[It] will be RM4.5 billion worth of work to be executed [for the whole of] this year. We are targeting about RM5 billion to RM6 billion every year over the next two years.

You don’t think you are taking on too much at this point in time?

We brought in RM10 billion in revenue in 2016. So with RM5 billion, RM6 billion, there’s still a lot of headroom there for us. This is what we feel we must do. The project in Abu Dhabi [which was cancelled] is coming up again, and we are putting in a bid. Possible delays have already fitted into our projection. We are looking at about RM1 billion, RM1.5 billion moving [later].

Would you say Sapura is comfortable now, with the oil price at current levels?

I think we need to be more efficient. That’s why we continuously improve. Because as we improve, our competitors also improve. So the continuous improvement mentality must always be there.

What is the price of oil your calculations are based on?

We benchmark our price of oil at US$35 … It’s a challenge.

Which region is your largest revenue contributor?

Brazil.

We heard you overpaid for some assets like Seadrill’s rigs.

I think that Seadrill was valued with contracts in hand. It was valued based on DCF (discounted cash flow method) by CIMB and Maybank. It was US$2.9 billion (for) 22 rigs. These were not exploration rigs, these were developmental rigs. What happened? Oil price crashed. They were valued with contracts in hand. And operators cut the contracts. If that was a mistake that we made, it was because we did not predict the first oil crash.

Do you see a future need for recapitalisation?

If you ask PNB and myself, for sure we don’t want [it]. Because we think — and we are very clear — that if we did not need a cash call when we were really in a bad state, why should we need the cash call at this time?

There is a perception that you don’t get along with your largest shareholder (PNB).

How to say this … There is no such thing. Why did they invest in the company in the first place? I think we need to ask. In what way are we not getting along?

We hear a lot of things, like there were plans (by PNB) to remove the (Sapura) board.

No … PNB put in RM2.7 billion in the rights issue. Sapura Holdings, RM532 million. That is myself and my holding company. The management put in RM16 million. If you look at that, really, the intent was to work together.

On top of that I have the guarantee, the lock up (of shares).

You are not allowed to sell your shares, right?

No. So, opportunity costs from RM4 to 10 sen is to the tune of up to RM2 billion. One may argue that you are a guarantor as you are a CEO, as the CEO should be guaranteeing the minority shareholders. I am also a minority shareholder, I just happen to be the CEO.

But in any way, in any discussion of a board, there will always be debate on whether to do A or to do B. But just because there is debate does not mean that is not healthy. If you look at the board today, let’s say there is a disagreement. The board is made up of six independent [directors], only two guys from Sapura, myself and my brother. The rest can outvote me anytime. So where is this issue of Shahril controlling the board?

So how best do you describe the relationship between the largest shareholder and you?

It is the perception of risk, or the in-depth understanding and the belief that there is this US$300 billion market. If one was risk-averse, then you will always have a difference in opinion on how things are to be executed, to one who is risk-affine. So that debate is actually a healthy debate, to calibrate, to come to the best decision between risk adversity and risk affinity. To me that is natural and should be the case. We cannot have a board that does not debate.

The perception is you managed to remove the PNB CEO.

If I can, why would I want to remove somebody? Might as well I put myself as a bank governor (or someone powerful) if I have that kind of influence.

Did you have a lot of friction with the former CEO?

There’s no friction. I don’t have any friction. I speak my mind, I’ve always spoken my mind. I think all of you know. I call a spade a spade.

People talk about your (high) pay. What do you say about that?

If you compare to global companies, I am underpaid. If you compare to Malaysian companies, maybe a bit too much. But there is a board. There is a remuneration committee. There are consultants. Not only mine, but everyone’s pay is benchmarked to performance.

Pay, you can look at it in so many ways. Different people have different value systems, so it is difficult.

Personally, how do you feel when you see your share price battered?

If tak sakit, bukan manusia lah. In history, is there another Malaysian company like this (Sapura)? From a technical, people development standpoint? People don’t see this. If you look from a pure capitalist standpoint, you don’t make money, you face the music.

Do you think your shareholder (PNB) could be upset with financial performance and expects accountability?

For sure.

Do you think accountability-wise, there is anything for you to add?

Can there be more accountability than (putting in) your own money? Why would these guys [points to some of his senior executives present at the interview] put their life savings in the company? They won’t allow me to be reckless. There are multiple levels of accountability here. For someone to sell non-governance here, I think is very, very irresponsible.

To even suggest I have a free hand to pay myself, you are not attacking me but the board members. You are saying they are not doing their job.

There is a private jet…?

It was never in Sapura Energy. It was part of Sapura Aero Sdn Bhd. But to be fair, when we do our rounds, we go from here to South Africa, to Rio, then to Mexico, then New York, then we come back, that’s when we use it. If you try to go to Brazil going through the commercial airlines, it takes a long time. And it is always full. We did that round in three days.

There was talk PNB wanted to remove the board. So if you are saying there is no animosity…

There was extensive debate … Who approved this deal (the buying into Sapura)? It was approved by the PNB board … The new one. To say, alluding to PNB not being approving — they saw the deal.

New Zealand is not an area that is known for hydrocarbon reserves…

We are in the Taranaki basin, which is a proven hydrocarbon province. We made a discovery in April ... You do not see any other E&P company with similar rapid growth in this region. We have net reserves of 94 million (boe), but if you account for the contingent resources, you have 264 million (boe). The aim for us is to go to a 100,000bpd company soon. That is what will put it as one of the top in the region.

Our production cost — US$7.90/bbl. That was last year. This year, we are looking at below US$5. So at US$35 we are fine. This is one of the most efficient companies, period. We are comparable to Saudi oil’s cost price. And we are offshore. SapuraOMV operates with the strength of about 300 people. Usually for a company with production of this size, they operate with 700 to 1,000 people. So when people say Shahril is on a spending spree, buying all these companies, there is a reason. Where are you going to find a company with these capabilities? So when I look at production cost per barrel, the company is worth more than the US$900 million (paid).

From here, the scale of operations is global. When we look at investments, we look at the people. We look at the chemistry, the construct and the kind of output it produces.

Coming back to the rigs, we dominate the market. And we are also the lowest cost operator. The bad luck is, the oil price crashed. That was what caused us [to be] a bit out of step.

When we bought this (SapuraOMV), the market was also saying we overpaid for the asset. This [E&P] company, we extracted [from it] US$560 million Ebitda and we sold 50% of the company for another US$890 million.

In Sarawak, we drilled 18 wells and made 12 discoveries. That is two-thirds. The industry norm is one in four.

You are looking at acquisitions?

There are also acquisitions and consolidation where you don’t use cash. Asset swaps, shares.

Is there any particular area you are looking at?

I’m open.

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