#Edge Weekly* SapuraKencana firing on all cylinders

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LAST week, SapuraKencana Petroleum Bhd announced US$700 million worth of contracts for its drilling rig division and a US$415 million engineering, procurement, construction, installation and commissioning (EPCIC) contract.

There have been many such contracts over the past few months. To put things in perspective, the oil and gas group’s order book stands at RM30 billion, up 20% from a month ago.

Over the past few years, the group has morphed into a very different entity with the acquisition of drilling assets and oil fields. SapuraKencana now has a huge appetite and a burn rate of about RM8 billion, based on FY2014 numbers.

Thus, while SapuraKencana’s order book looks impressive at RM30 billion, the bulk of it will give earnings flexibility for four years, its president and CEO Tan Sri Shahril Shamsuddin tells The Edge in an interview.

“We burnt more than RM8 billion last year, and we have a tender book of about RM30 billion … our hit rate is about 50%. But you must understand that our asset base is in excess of RM30 billion [RM31.5 billion to be exact], so we need quite a bit of work to ensure our assets are utilised,” he says.

This probably explains SapuraKencana’s consistent and aggressive bidding for contracts. Shahril points out that the group’s asset utilisation rate is high, with its tender rig business registering 95%.

“My job is to bring in business so that asset utilisation is high. In a downturn, I would like to see a higher utilisation rate for long-term contracts. But when the market is buoyant, I prefer a lower utilisation rate to capitalise on the more lucrative spot market jobs.”

SapuraKencana, with its large asset base, grabs opportunities at every portion of the value chain throughout the lifetime of an oil and gas field. And this strategy seems to be bearing fruit, judging by the company’s recent financials.

“The central part of our strategy is to have annuity income, to have a predictable Ebitda [earnings before interest, taxes, depreciation and amortisation], predictable cash flow, yielding very, very predictable PAT [profit after tax]. Then, on top of this, we get the EPCIC-type [contracts] which, when executed well, will give another layer of Ebitda. I think it’s all about precision and execution, and that’s our focus … we’re focusing on how we execute,” Shahril says. Huge gains in profits

Last Thursday, SapuraKencana announced its financial results for 1QFY2014 ended April 30. The group registered a net profit of RM509.4 million on the back of RM2.4 billion in revenue, translating into earnings per share of 8.5 sen.

SapuraKencana recognised a RM177.8 million gain from the acquisition of SapuraKencana Energy Inc Group (previously Newfield Exploration Co). This means that the group’s net profit for the three months under review was actually RM331.6 million.

Still, in comparison with the previous corresponding period, its net profit grew 254% while revenue rose 50%.

As at end-April, SapuraKencana had a cash and bank balance of RM1.7 billion, long-term debt commitments of about RM14 billion and current liabilities of RM1.2 billion.

The group’s financials hinge on its ability to bag lucrative jobs.

Prior to the awards last week, about 50% of SapuraKencana’s order book was from Brazil, a market known to have stringent requirements but high margins. About 27% was from home turf, Malaysia.

SapuraKencana’s share price has doubled in the past three years. Bluntly put, the oil and gas giant has not really fared well in term of share price performance compared with the smaller players, whose share prices have mostly jumped several folds.

However, CIMB Investment Bank gives SapuraKencana an “add” rating, has it as its top pick in the oil and gas sector and puts a target price of RM7, a 61.7% premium to its close of RM4.33 last Thursday. The target price is based on 23.4 times 2015 price-earnings ratio (PER), a 40% premium over CIMB’s implied target market PER of 16.7 times.

“The market has yet to fully appreciate the contributions of SapuraKencana Energy,” says CIMB’s oil and gas analyst Norziana Mohd Inon.  

The different new entity

Much of the changes at SapuraKencana can be attributed to the company’s acquisition of Seadrill Ltd’s tender rigs for US$2.9 billion (RM9.3 billion) in April last year, which in one fell swoop transformed SapuraKencana into the largest tender rig operator in the world, with 21 rigs or 56% of the global market share.

Shahril says the building blocks for the current behemoth were laid when he took over 39% of Crest Petroleum Bhd from beleaguered Renong Bhd for RM105 million in 2003.

“We have put together the key building blocks over the past decade, and today, we are a global full-fledged upstream service company. We are the only company that has such a diverse business line in upstream oil and gas.”

He adds that the jump in earnings and contract flows should not come as a surprise as he had made such a promise of strong contract awards and good earnings potential to the shareholders when the Seadrill tender rig acquisition took place.

“We are just keeping to our word. We’ve told the shareholders that the acquisition [of drilling assets] would bring in the contracts and that they would yield a certain [high] value. We’ve explained that this [drilling business] is a long-term, recurring annuity-type income business, which is the central part of our strategy, and we’ve told them that they would see [SapuraKencana’s] order book bulking up and you would see the company grow. We’ve also promised them more EPCIC jobs. So, our strategy seems to be working, we are firing on all pistons, all four business divisions,” he says.

Despite the high capital expenditure requirements in the oil and gas business, SapuraKencana announced a maiden interim dividend payment of 1.35 sen per share and a special dividend of one sen.

“This year, it’s about optimising and generating maximum cash for the shareholders. What we need to do is extract yield from the assets that we already have,” Shahril says.

The group’s largest shareholders are Shahril and his brother Datuk Shahriman Shamsuddin (16.8%), the Employees Provident Fund (13%), Tan Sri Mokhzani Mahathir (10.3% via his vehicle Khasera Baru Sdn Bhd) and Seadrill Ltd, which is controlled by Norwegian billionaire John Fredriksen (8.2%). The company’s free float stands at 23.3%.

‘We are delivering what we promised’

SapuraKencana Petroleum Bhd’s burgeoning businesses in Brazil, Central America and Africa have made its president and CEO Tan Sri Shahril Shamsuddin a difficult man to pin down for an interview.Nevertheless, his efforts seem to be paying off as SapuraKencana seems to be on a high, with an order book bursting at its seams at RM30 billion, and the new ventures — drilling and operating oil fields — giving a big boost to its earnings.Here are excerpts from the interview.

The Edge: Your recently released financials were solid.Tan Sri Shahril Shamsuddin: Yes. We know our margins and expect to have a certain amount of wins from our bid book, that will continue to fuel our growth. Our results are in line with our plans for the company.

SapuraKencana is now a different entity from a few years ago.It is different because we have grown and we have been able to integrate the people and capabilities. My main goal is to get the people to own the company ... to have ownership over the integrated unit and to believe in the business plan.You see all our businesses are growing as planned. You can see the integration portion of it also yielding results, you see contracts, some won, some on the horizon, and at the same time, the internationalisation is also working really well.

What’s next for SapuraKencana?Now that we have different businesses in different areas, we can cross sell capabilities to grow our business. For example, in West Africa, where we have our semi-tender business, there are opportunities for SURF (subsea umbilicals, risers and flowlines), opportunity to do fabrication and opportunity to do pipelaying.Our goal this year is to get our claws into an operation, that’s what we are doing. We have RM1.7 billion in the bank, we are a cash-generating machine. We have started accumulating cash to fuel activities for gowth.

Your focus going forward will be on Latin America?I think Africa and Central and South America … of course, our home turf, we will defend it, it’s important to us. This year, it’s about optimising and generating maximum cash for the shareholders. What we need to do is extract yield from the assets that we already have.

What about RSCs (risk service contracts)? Are you eyeing any new ones?We are looking at them. To digress a little, we made money on Berantai because we owned the assets. If we didn’t own the whole value chain, we wouldn’t have had the speed to execute the contract. The depth and breadth of competency of the group is really under-estimated.

How about your debt level? Some say it’s high?Our gross gearing is 1.21 times, our net gearing is 1.09 times and we have extra cash. We have RM30 billion plus in assets, our debts are RM15 billion.So the combination of our strong order book and transparency on our Ebitda generation as well as the value of our assets outweighs the perception that we are highly geared.

This article first appeared in The Edge Malaysia Weekly, on June 23 - June 29, 2014.