This article first appeared in The Edge Malaysia Weekly on April 2, 2018 - April 8, 2018

THERE is a lot going on at Sapura Energy Bhd. Just last week, the company made a number of material announcements.

Mid-week, Sapura Energy announced that it had suffered a net loss of RM2.5 billion on revenue of RM5.89 billion in its financial year ended Jan 31, 2018 (FY2018). However, the bleeding was largely due to an impairment loss of a whopping RM2.1 billion on its drilling rig business.

The results saw the company’s share price crumble, plunging 13.8% from its close on Tuesday to a day’s low of 47 sen on Wednesday afternoon.

It is worth noting that Sapura Energy had a similar impairment loss in FY2016, when it was known as SapuraKencana Petroleum Bhd, due to a low oil price environment.

Nevertheless, a day after announcing its FY2018 results, the company announced that a consortium in which it has a 30% stake had outbid six other outfits for exploration rights at Block 30 in Sureste Basin, a proven and prolific hydrocarbon province in the Gulf of Mexico.

PublicInvest Research says while it is too early to assess the financial impact of the award at this juncture, it is undoubtedly positive and solidifies the group’s longer-term prospects, particularly when crude oil prices look likely to remain above US$60 per barrel.

Also last week, Sapura Energy announced its first foray into New Zealand with a series of farm-in agreements on five offshore exploration permits in the oil and gas region of the Taranaki Basin.

These announcements come on the back of the company securing an engineering, procurement, construction, installation and commissioning contract for the Pegaga Development Project from Mubadala Petroleum. The job is to be undertaken at the offshore integrated central gas processing platform facility in Block SK320 in the offshore waters of Sarawak.

While no details are available, the contract is estimated to be worth RM1.8 billion.

Since early this year, Sapura Energy has secured RM2.7 billion worth of new orders in the service segment, nudging its order book to RM16.6 billion. The orders are seen to contribute to its FY2019 financials.

Another potential catalyst for the group is the planned listing of its energy arm. CIMB Research analyst Raymond Yap says in a note that assuming a valuation of RM6 billion and Sapura Energy selling a 30% stake in its energy arm, the proceeds will be RM1.8 billion, which can be used to repay the group’s debts and ensure that it has minimal debt repayments until FY2023.

“This should ease the concerns of many investors we have spoken to,” Yap adds.

As at Jan 31 this year, Sapura Energy had cash and cash equivalents of RM1.72 billion while on the other side of the balance sheet, it had long-term debt commitments of RM14.69 billion and short-term borrowings of 1.72 billion.

But is the worst over for Sapura Energy?

Institutional investors, such as the Employees Provident Fund (EPF), Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and AmanahRaya Trustees Bhd-Amanah Saham Bumiputera (ASB), a unit of Permodalan Nasional Bhd (PNB), have been actively trading Sapura Energy’s stock after the company released its latest results.

While the EPF seems to have sold a considerable amount of its holding, from 11.24% on Jan 2 to 6.38% on March 22, KWAP has pared its holding only marginally to 7.19% from 7.25% in mid-January. ASB’s holding stands at 6.46%, down from 6.73% in mid-December last year.

Maybank IB Research analyst Liaw Thong Jung says the impairment loss on Sapura Energy’s drilling assets will save RM160 million per annum in depreciation from FY2019. “That will be offset by lower drilling asset utilisation on flattish daily charter rates. The E&C (engineering and construction) operation should see moderate recovery from FY2020,” he says in a note to investors.

MIDF Research analyst Aaron Tan says he sees Sapura Energy turning the corner. “We expect the group to return to the black in FY2019. A chunk of the group’s earnings will stem from the upbeat offshore activity levels of the E&C segment and higher crude oil prices of the exploration and production (E&P) segment,” he says in a note.

Crude oil prices have appreciated 5% year to date, reaching around US$70 last Friday, which is a boon for oil and gas companies, including Sapura Energy.

According to Bloomberg, 13 out of the 16 analysts covering the stock have a “buy” call on it. Maybank’s Liaw has a “buy” call on the stock and a target price of RM1.20 while MIDF’s Tan, who also recommends a “buy”, has a target price of RM1.01.

CIMB’s Yap has an “add” call on Sapura Energy and a target price of 89 sen while Public Invest Research has a “trading buy” and a target price of RM1.11.

However, not everyone is bullish on Sapura Energy. AffinHwang Capital reiterates its “sell” call for now because it believes the outlook for the company remains challenging for a couple more quarters before E&C activity picks up.

“While its order book is higher at RM16.6 billion, the impact on earnings may likely be felt later on when E&C activity picks up. Net gearing rose from 1.26 times to 1.56 times quarter on quarter as a result of the impairment loss,” the research house says.

Sapura’s share price has declined 70.3% since the beginning of the year. It closed at 54.5 sen last Friday, giving the company a market capitalisation of RM3.27 billion.

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