Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on July 13, 2020 - July 19, 2020

SAPURA Energy Bhd’s oil discovery in New Zealand last week is seen as supporting the rapid growth trajectory envisioned in its exploration and production (E&P) space — which it first entered at the peak of the oil market in 2013.

The find is another stamp of approval for the division, which has targeted to double its production this year.

Meanwhile, the group’s engineering and construction (E&C) and offshore drilling divisions are struggling with their own challenges amid the volatile oil and gas market.

Last Thursday, Sapura announced that 50%-owned E&P unit, SapuraOMV Upstream Sdn Bhd, together with joint-venture partners Mitsui Exploration and Production Australia Pty Ltd and OMV New Zealand, had struck oil in the prolific Taranaki Basin 50km offshore. Drilling commenced in March and oil was struck at a depth of 130m. The JV is currently working to determine the well’s commercial viability.

Few other details have been shared.

In an interview with The Edge, Sapura president and group CEO Tan Sri Shahril Shamsuddin explains that SapuraOMV is also planning to drill two wells in Australia next year and one in Mexico by early 2022, where a discovery was made by another operator 30km from its asset in the Sureste Basin.

“We have net reserves of 94 million (barrels of oil equivalent, or boe) but if we account for the contingent resources, you have 264 million — or 170 million more in the pipeline to be developed,” says Shahril.

“This will translate into rapid production growth. The aim for us is to be a 100,000bpd company by the middle of this decade. That is what will make us one of the top independent O&G companies in the region,” he adds.

In fact, the New Zealand find had not been incorporated into its internal growth target, he notes.

As it stands, SapuraOMV is planning to raise its average annual production from 13,000 barrels of oil equivalent per day (boepd) last year to 33,000 boepd in 2020 and 66,000 boepd by 2024 — much of which will come from increasing gas production in Sarawak.

The group is planning to sign a gas sales agreement (GSA) in the Jerun phase of its SK408 gas field soon. “In fact, our current production is at 44,000 to 45,000 [boepd],” he adds. “Once Jerun [GSA] is signed, we will be, production-wise, the third largest gas producer in the region, just behind Petronas and Shell.”

 

Low oil price, lower production costs

Higher production may not immediately boost the all-important bottom line. The performance of the E&P division is also dictated by oil and gas prices, and operating expenditure. This was seen in the group’s E&P segment loss in 1QFY2021, as prices remained suppressed despite the slow climb from the April bottom of under US$20 per barrel.

The group raised 2.4 million boe in 1QFY2021 or around 27,000 bpd, making a pre-tax loss of RM6.1 million. Brent averaged US$35/bbl during the period.

In May and June, Asian LNG prices averaged near a record low of US$2 per million British thermal units (mmbtu). In the same period, Brent crude oil prices averaged US$36.69 per barrel.

Sapura claims to have improved its control over costs. According to Shahril, SapuraOMV’s average break-even cost per barrel is below US$10 — unheard of in a long time in local offshore production.

“It will be even lower this year,” says Shahril. “We have one of the most efficient E&P companies in the region.”

The benchmark crude price last traded at US$41.72/bbl, compared with Sapura’s US$35-US$38 per barrel self-imposed price for internal planning and budgeting.

Comparatively, the only other locally-listed oil production company, Hibiscus Petroleum Bhd, has reserves of some 140 million barrels and is targeting to produce 20,000 bpd in 2021, with cost per barrel of between US$15 and US$18.50.

 

Preparing for opportunities or stretching itself too thin?

Ever ambitious, Shahril says SapuraOMV is also “very intently” looking at target companies with hydrocarbon assets.

“The board has also given us strong support to go into the M&A space. Now is a good time — there could be some distressed assets,” he says. “But we have to be mindful not to stretch ourselves too thin, being a company of this size, so we are very, very careful on where we want to be.”

It will be a tough decision to look for growth when pundits are questioning the group’s cash flow and balance sheet positions.

While the E&C arm was profitable in 1QFY2021 following the write-off last year, analysts opine that the real cash constraint will surface this year.

Meanwhile, its drilling division, which contributed cash flow of RM400 million in FY2020, could see a huge dip in utilisation before picking up in FY2022, if not later.

Out of the 16 rigs Sapura owns, the drilling segment needs to see utilisation of seven to eight rigs to break even. It has so far locked in jobs for four rigs in the medium term. Meanwhile, its bulky order book for the E&C segment is also capital-intensive, with earnings lumped towards the end of the project tenure.

The group’s cash flow was again squeezed in 1QFY2021 with a cash balance of RM710.97 million at end-April, as opposed to RM772.37 million at end-January.

As a result, Sapura is working to slash RM800 million from its group operating expenditure this year to stay afloat.

The group seeks to have RM1.5 billion in working capital while refinancing its US$2.5 billion debt by year-end. Group debt-to-equity ratio stood at 1.05 times, which Shahril says is normal in the industry.

It does not help that the opportunities Sapura excitedly prepared for six years ago are delayed yet again by the supply-demand shock in the oil market this year. In 2014, it completed the acquisition of its first offshore production asset from Newfield Exploration Co for US$898 million, which has grown to become the group’s asset with the most potential. As such, the sale of a 50% stake in its E&P unit to Austria’s OMV Aktiengesellschaft for US$975 million in 2018 was seen as something less desired, though much required, to support its balance sheet.

Also in 2014, Sapura positioned itself as the largest tender rig operator following the US$2.9 billion acquisition drilling assets from Norway’s Seadrill Ltd, but the oil price crashed and the jobs have not really come back.

Shahril justified the company’s stand. “Industry research shows that the offshore service industry and E&P are volatile compared with the overall market, but deliver superior returns over the long term.

“So you have to go through the cycle, then you will see the returns. The data is there,” he says.

 

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