This article first appeared in Forum, The Edge Malaysia Weekly on December 20, 2021 - December 26, 2021

Under normal circumstances, if a government fund such as Permodalan Nasional Bhd (PNB) were the single largest shareholder of a listed company, the entity would have little problem securing a line of credit. But this was clearly not the case with Sapura Energy Bhd.

After raising RM4 billion in September 2018 to ease its debts, Sapura was supposed to obtain another RM2 billion for working capital. But the additional funds did not come through as banks had second thoughts.

It put pressure on the oil and gas giant’s cash position, a situation the company is addressing now by divesting its assets.

Sapura’s cash flow problems come less than three years after it undertook the massive fundraising exercise, which could not have happened had PNB not extended its support to the company.

PNB put up RM2.67 billion of the RM4 billion raised and ended up increasing its stake in Sapura from 12.2% to 40%. The fund, which has RM337 billion of assets under management, was also an integral part of the group’s debt restructuring plan, in which bankers agreed to extend its loan repayment terms on the condition that PNB remained a shareholder.

After the debt restructuring exercise and sale of a 50% stake in an upstream asset, Sapura’s borrowings dropped to RM10.3 billion and its gearing is now at 1.1 times. Prior to the asset sale and fundraising, the company’s debt was RM16.5 billion and its gearing was almost 1.6 times.

Even as PNB upped its stake in Sapura, there were whispers in the oil and gas industry that a combination of fundraising and debt restructuring would not be enough to save the company. It required a strong management team that would divest assets that were not performing well, shrink the size of the group and ensure that the jobs at hand were not loss-making.

Mitigating risk and making a profit from jobs is a major challenge for all oil and gas companies, not just Sapura. The pandemic made the task of managing the cost of jobs even harder.

Sapura, whose order book is now less than RM8 billion, used to have an order book of about RM30 billion. However, making a profit from the jobs at hand is proving to be tough. As CEO Datuk Anuar Taib said in an interview last month, “winning a series of bids is good for the headlines but what pays us is profit”.

In Sapura’s case, the numbers were not being reflected at the bottom line.

Anuar took over as CEO of Sapura from Tan Sri Shahril Shamsuddin, who stepped down in March this year.

PNB, being a fund that does not usually get involved in companies’ operations, was certainly not the right investor for a company such as Sapura. So why did it put money into the oil and gas giant when the going was tough?

Why didn’t it learn from the experience bankers faced when they underwrote the rights issue of Saipem S.p.A in 2016? Saipem, which like Sapura is an integrated oil and gas services provider, undertook a €3.5 billion rights issue that was undersubscribed, resulting in the banks holding some of the shares.

According to PNB’s president and chief executive, Ahmad Zulqarnain Onn, its investments in Sapura were made based on the recovery of oil and gas prices in 2017 and 2018. He said with additional capital, the fund envisaged that its investments would pay off.

If PNB had wanted exposure to the sector, it had a choice of investing in many other companies from which it could have enjoyed steady dividends and even capital appreciation without having to worry about the operations.

To be fair to Ahmad Zulqarnain, PNB was helmed by Tan Sri Abdul Wahid Omar and Datuk Abdul Rahman Ahmad when it decided to put money into Sapura.

Sapura’s debt was one of the biggest in the banking sector. Malayan Banking group led the list of lenders, which included CIMB Group, RHB Bank and AmBank. If there was a default, it would have hit the banking sector badly and PNB would be impacted as well. This is because one of PNB’s cornerstone investments is its 49% stake in Maybank, which gives it healthy annual dividends.

Did PNB step in because Sapura was too big to fail?

Ahmad Zulqarnain contends that saving the banking system was not the fund’s paramount consideration for putting money into Sapura. Nevertheless, PNB is now left holding the baby.

Sapura CEO Anuar has considerable upstream experience, having worked at Shell Malaysia and Petronas. Its chief financial officer, Chew Seng Heng, also had a stint at Shell, among other oil and gas companies. The duo should be able to mitigate the risks for the new projects they take on and ongoing ones as well.

Also, the industry outlook for integrated service providers is improving. All the big players — namely Saipem, Halliburton and Schlumberger — are reporting better numbers. Having described 2020 as really bad, they say this year is a transition period towards better times, on the back of oil prices that average above US$70 per barrel.

But whether PNB can recover its investments in Sapura remains to be seen. Relative to its asset size of RM337 billion, the money it has put in Sapura is small. But the point is, will it turn out to be a worthy investment?

M Shanmugam is contributing editor at The Edge

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.