It is just days before what could be Malaysia’s most fiercely contested general election since its independence. Shahril Shamsuddin, group president and CEO of Main Board-listed oil and gas (O&G) services provider SapuraKencana Petroleum Bhd, is ensconced in a tiny meeting room at the Fullerton Bay Hotel in Singapore.
Sitting next to him is the company’s executive vice-chairman Datuk Mokhzani Mahathir, whose father Tun Dr Mahathir Mohamad was prime minister of Malaysia for 22 years and still casts a long shadow over the country’s political scene.
The pair had flown to Singapore for a string of meetings with the media on April 24 to address the perception that SapuraKencana’s business turns on little more than political largesse and would be at risk in the event of a change in government in Malaysia.
On April 5, Datuk Seri Anwar Ibrahim, the de facto leader of the Pakatan Rakyat opposition coalition, told a crowd during a campaign speech in Perak that the flow of contracts from Petroliam Nasional Bhd (Petronas) to Mahathir’s family would be stopped if he came to power.
SapuraKencana was formed in 2011 through a merger between Shahril’s offshore engineering company SapuraCrest Petroleum Bhd and KencanaPetroleum Bhd, an O&G driller and fabricator led by Mokhzani.
SapuraKencana is now Malaysia’s largest O&G services provider with capabilities in offshore fabrication, subsea pipeline installation, hook-up commissioning, oilfield engineering and drilling.
Neither Shahril nor Mokhzani deny that a significant portion of their business does indeed comes from Petronas.
In fact, about half of SapuraKencana’s present order book consists of work in Malaysia, most of it linked to the national oil company.
Among the more significant deals the pair has won is a RM836 billion contract to develop and operate the Berantai offshore O&G field near Terengganu, which was awarded to SapuraKencana and the UK’s Petrofac in 2011.
However, they insist that their success has been the result of nothing more than merit, hard work and risk-taking. “We bid for these contracts alongside international service providers such as Shell, ExxonMobil, Murphy Oil Corp and Petronas Carigali,” says Shahril.
The way he tells it, licensed bidders for contracts are first subjected to a technical evaluation process by a consortium consisting of Petronas and its partners, which include international oil companies.
That is followed by a commercial bid for the contract, where bidders submit their development proposals to the consortium, which selects the winner of the contract based on its capabilities, track record and cost.
“It is just a perception that we win the contracts based on handouts. It is far from the truth,” Shahril says. “Sometimes, it just makes more sense to give the contracts to a local player because we are able to operate more efficiently and at a lower cost compared with someone international.”
Now, even as the winds of change blow in Malaysia, SapuraKencana is preparing to expand abroad and reduce its reliance on its home market. On April 24, the same day Shahril and Mokhzani were in Singapore, the company finalised the acquisition of 18 tender rigs from Seadrill at US$2.9 billion (RM8.8 billion), which it paid for with 587 million new shares priced at RM2.80 each.
Seadrill, which is controlled by Norwegian shipping tycoon John Fredriksen, now owns 12.5% of SapuraKencana. Shahril owns 16% of the enlarged company, while Mokhzani owns 13.5%.
Tender rigs are barges that carry drilling equipment to oil platforms at sea.
They are attached to drilling rigs while in use and can be removed when work is completed. The vessels allow SapuraKencana the flexibility to move its rigs from one site to another.
Currently, day rates for tender rigs range between US$88,000 and US$92,000 for operating at water depths of up to 410ft. Over the next five years, day rates are forecast to fluctuate between US$110,000 and US$130,000.
SapuraKencana now has a fleet of 21 tender rigs, including five that are still under construction. Globally, there are just about 43 tender rigs in operation. Prior to the deal with Seadrill, SapuraKencana conducted engineering, procurement, construction, installation and commissioning (EPCIC) work in Malaysia, West Africa, South America and the Gulf of Mexico.
With the additional rigs from Seadrill, the company will be pushing into markets such as Trinidad & Tobago, Thailand, Brunei and Indonesia. Shahril also sees potential tender rig hotspots in Indochina arising in the future.
By next year, Shahril is expecting at least 50% of SapuraKencana’s revenues to come from its tender rig business. “We want to be a global O&G services provider both in EPCIC as well as in drilling,” says Shahril. “This was a good opportunity for us to integrate our assets with our partner’s to grow bigger.”
Started small
For the financial year ended Jan 31, 2013, SapuraKencana reported revenue of RM6.9 billion and earnings of RM664 million. The company currently has a market capitalisation of RM15 billion.
“We started out in the 1990s as small-time contractors, before the industry became glamorous, and when oil was just US$15 to US$16 a barrel,” says Mokhzani. “We worked hard and invested in expanding to where we are today, when other contractors were unwilling to take that risk.” Now, SapuraKencana is among the key plays in Malaysia’s O&G sector. The company itself subcontracts about RM3 billion worth of work a year to a roster of some 500 contractors.
While SapuraKencana has been expanding internationally, Mokhzani sees no let-up in activity in Malaysia.
According to him, O&G production in Malaysia has declined in recent years, due to maturing oilfields and limited investments in new oilfields.
However, Petronas has allocated RM300 billion over the next few years towards more offshore exploration and production activities.
That could spell a pick-up in business for the likes of Sapura-Kencana.
What about Anwar’s pledge to stop the flow of business from Petronas to Mahathir’s family? Is Mokhzani now a liability to SapuraKencana? “We have grown into the biggest O&G player in Malaysia, with more than RM4 billion in assets today.
We have capacity and experience that cannot be taken off the market. Petronas has to engage us because we have the capability, track record, financial resources and 10,000 employees to execute the work,” says Mokhzani. “Should there be a government change and [Anwar] wants to take away oil contracts from us, who then will the contracts be given to?”
Growing overseas
Meanwhile, SapuraKencana continues to demonstrate its competitiveness beyond Malaysia. The company is currently executing subsea engineering works under a US$1.5 billion contract in Brazil. It has also been shortlisted as one of the final bidders for a Petrobras tender to operate seven new pipelay support vessels. Some market watchers say it stands a good chance of winning contracts to operate three of these vessels for RM7 billion.
“How did we become competitive in the global market if we were not competent in our local market in the first place?” asks Shahril.
“To check whether this is a crony company or a full-fledged O&G company that is winning jobs globally, we need to look at the facts. Look at our order book — more than 50% is outside Malaysia. How did we do that if we were just a company with contracts being handed out to us? Our markets are diversified globally and across different sectors.”
Indeed, the overseas portion of SapuraKencana’s order book is spread across the Middle East, Brazil, Australia, India, the UK and the US. Shahril and Mokhzani are not stopping there. In the quarters ahead, they intend to bid for US$6 billion worth of new contracts worldwide.
About 40% of the contracts the company is bidding for are in Brazil, while another 30% are for work in India and Africa.
So, is SapuraKencana a good bet for investors looking to invest in Malaysia? Would a sell-off as the general election draws near be an opportunity to buy?
The Malaysian stock market has, in fact, been among the worst performers in the region over the past year, partly because of concerns about political change. Over the past 52 weeks, Malaysia’s benchmark market index is up 8%, trailing gains of 20% and 23% by Indonesia and Thailand respectively.
Even the Singapore market is up 12% during the same period. Shares in SapuraKencana have done better than the broad market, though. Over the past 52 weeks, they have risen 55.6%, lifted by contract wins and the deal to acquire Seadrill’s tender rigs.
In fact, shares in SapuraKencana hit a 52-week high of RM3.22 on April 8, just three trading days after Anwar’s speech about stopping the flow of business from Petronas, Mokhzani points out.
The stock is currently trading at 26.5 times forward earnings. Of the 22 analysts who cover the stock, 19 are recommending “buys”, with target valuations ranging from RM3.10 to RM4.50.
“We plan to focus on strengthening our capabilities and technologies both within Malaysia as well as on a global scale,” says Shahril. “At the end of day, we have delivered growth based on our execution and strategy. We are a public listed company and our track record, order book and numbers can be plainly seen. Investors should be able to make their own judgements on whether this is a professionally-run company or not.” — The Edge Singapore
This article first appeared in The Edge Financial Daily, on May 2, 2013.