This article first appeared in The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

SAPURA Energy Bhd’s record quarterly loss of RM6.61 billion shows that a lot needs to be done to nurse the upstream oil and gas contractor back to financial health.

The massive loss in the quarter ended Jan 31, 2022 (4QFY2022), which included an operating loss of almost RM1 billion brought about by legacy contract issues, came despite the elevated oil prices, which averaged at US$81 per barrel in the three months ended January.

Together with impairments on assets of RM5.39 billion, the latest results will likely see the cash-strapped company fall into the Practice Note 17 category, after its shareholder equity fell below the minimum threshold of 25% of its paid-up share capital.

There is also growing urgency for Sapura Energy to secure capital in order to maintain vendor support and execute ongoing projects. This is on top of ongoing efforts to restructure its debts of RM10.66 billion and address legacy contracts that had caused an Ebitda loss of RM2.36 billion in FY2022.

The slew of bad news in recent months, from liquidity issues to winding-up petitions served by vendors, and the massive impairments had dragged Sapura Energy’s share price to a fresh low of three sen on March 24. This valued the group at only RM419.45 million, from nearly RM2.1 billion a year ago.

Analysts have turned bearish on the counter, with nine “sell” calls and one “buy” recommendations, and an average target price of 3.5 sen. The different views lie in their expectation of the speed of a turnaround, with many citing liquidity issues as a hindrance to future job wins.

In a commentary on its prospects, which accompanied its financials, Sapura Energy says “businesses and assets that are not core to our future business direction will be divested” to reduce debt. It will also balance its project portfolio with transport and installation activities, it adds.

BIMB Research, which has a contrarian view, has a target price of 15 sen on the counter. It says in a March 21 note that it sees the company disintegrating its drilling business and strengthening its engineering and construction (E&C) business as the latter forms the backbone of the local oil and gas ecosystem.

It is indeed a tough call for Sapura Energy. On one hand, the E&C and operations and maintenance (O&M) divisions were the ones that brought about the Ebitda loss of RM2.36 billion due to legacy contracts. On the other hand, the drilling division was Ebitda positive at RM380 million in FY2022.

However, its ageing drilling assets — whose average useful life has been reduced to five years — was the main reason behind the RM2.1 billion impairment on property, plant and equipment (PPE) in 4QFY2022.

Sapura Energy has 12 rigs, of which three have been categorised as scrap cold-stacked rigs due to a long period of being stacked, amid the absence of firm prospects due to delays in the reopening of the US market, according to the group’s 4QFY2022 presentation to analysts.

Another valuable asset is Sapura Energy’s 50% stake in exploration and production (E&P) outfit SapuraOMV, with its Jerun gas field off Sarawak that is expected to produce 500 million standard cu ft per day (MMSCFD) of gas upon commissioning in 2024.

Its 50% partner, Austrian outfit OMV Aktiengesellschaft, was mum when asked whether it had plans to raise its exposure in the JV. It acquired the 50% stake in 2018 for US$890 million (RM3.7 billion).

“Decisions regarding portfolio are communicated once the decisions have been taken,” it said in an email reply to The Edge.

Talk of Petroliam Nasional Bhd (Petronas) taking a “significant stake” in Sapura Energy to facilitate its recovery was quickly dismissed by the national oil company.

“Petronas wishes to categorically deny these reports and speculation. The group has always been and will continue to be strictly guided by an established framework for any investment or divestment consideration,” it said in a statement last Friday.

Sapura Energy’s substantial shareholders comprise Permodalan Nasional Bhd, with 40% equity interest, followed by its former chieftain Tan Sri Shahril Shamsuddin and his brother Datuk Shahriman Shamsuddin, a non-independent non-executive director of the company, who collectively have a 12.82% stake.

In 4QFY2022, Sapura Energy wrote off RM3.29 billion in goodwill on consolidation, which had been allocated to its E&C and drilling business segments in the days of SapuraKencana Petroleum Bhd.

It is noteworthy that Sapura Energy still has RM1.71 billion of the goodwill on consolidation categorised under intangible assets, from RM4.93 billion previously, and RM6.73 billion in PPE, down from RM9.22 billion.

Meanwhile, the group’s shareholder equity amounted to RM254.18 million, down from RM8.94 billion at end-FY2021, after taking into account its accumulated losses of RM13.52 billion against its paid-up share capital of RM10.87 billion.

Management highlighted in 4Q2021 that the group hoped to unlock RM800 million from its contract assets and Covid-19 provision claims still under negotiation with its clients to address its immediate funding needs. Its trade payables had ballooned to RM3.71 billion against its trade receivables of RM1.33 billion as at end-FY2022.

To be sure, some of the issues dragging Sapura Energy are also faced by its competitors, reflecting the challenges in the industry in recent years.

Italian offshore contractor Saipem is said to be seeking €1.5 billion via a cash call, amid looming debt payments in April and in 2023. Its share price fell 40% this year after it forecast a sizeable loss for full-year 2021 in January, on the back of higher costs for E&C projects that were only partially recoverable, as well as difficulties in executing its offshore wind projects.

Earlier in 2020, competitor McDermott completed a restructuring that saw almost all of its US$4.6 billion of funded debt converted to equity, while TechnipFMC booked goodwill impairment of US$2 billion and assets impairment of US$400 million.

Sapura Energy has reduced its bid book from more than RM50 billion previously to RM28 billion to reflect its renewed focus and risk framework. Concurrently, Saipem’s recent US$325 million drilling contract win for a three-year period from Aker BP hints that a recovery is in the works.

But even if Sapura Energy’s restructuring goes as planned, the road ahead remains bumpy. About 30% of its revenue forecast for FY2023 will still come from its legacy contracts, which analysts say could continue dragging the group’s overall performance.

This includes the monopile installation project for the Yunlin wind farm off Taiwan, as well as the RM3 billion contract for the development of the central processing platform and living quarters for the Oil and Natural Gas Corp Ltd (ONGC) in India.

The latest quarter saw a 68.61% drop in revenue to RM453.14 million from RM1.44 billion in 4QFY2021, highlighting the execution challenges due to a lack of access to adequate working capital facilities.

Sapura Energy’s full-year FY2022 loss of almost RM8.9 billion is over 95% more than its previous record loss of RM4.56 billion in FY2020. Meanwhile, its latest full-year revenue of RM4.12 billion was the weakest since the company was formed following a merger between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd in May 2012.

Sapura Energy is undergoing the necessary to emerge on a clean slate, but it remains to be seen if it can capitalise on the high oil prices — US$119 per barrel at the time of writing.

While the company continues its search for funding and ways to address its contracts, the next three months provided by the courts to address its scheme of arrangement with creditors will be crucial to ironing out its path to survival.

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