This article first appeared in The Edge Malaysia Weekly on April 25, 2022 - May 1, 2022
The Edge has reported extensively on the troubles plaguing Sapura Energy Bhd in the past few years. This week, we present our most comprehensive and detailed analysis of key events from the time of the mega merger of Sapura Crest Petroleum Bhd and Kencana Petroleum Bhd in 2012. We have our view on what went wrong and what can be done (The Edge Says, Page 60). Readers can also make their own conclusions from the facts and figures we have compiled from the company’s annual reports and other official announcements.
SAPURA Energy Bhd is on the verge of bankruptcy, only three weeks shy of the 10-year anniversary of the mega-merger between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd, which created SapuraKencana Petroleum Bhd in mid-May 2012. Its name was changed to the current one at end-March 2017.
From a merger valuation of RM11.85 billion, Sapura Energy’s market capitalisation swelled to RM28 billion in early 2014, following the acquisition of Seadrill Ltd’s rig business and Newfield International Holdings Inc’s Malaysian assets. At its peak, Sapura Energy was the world’s second largest integrated oil and gas service provider.
However, oil prices crashed in mid-2014 and with that, Sapura Energy’s fortunes followed suit. The company started chalking up losses in the financial year ended January 2016 (FY Jan 2016) and has been loss-making annually since then except for one year (FY2017). Its market capitalisation today is a mere RM639 million, even after a RM4 billion cash call — the rights issue in 2019.
Looking at Sapura Energy’s financials for the past 10 years since its merger exercise, a lot can be concluded (see Table 1).
From FY Jan 2013 to FY Jan 2022, Sapura Energy has:
Generated total revenue of RM68.6 billion from continuing operations
Earned total earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM12.7 billion from continuing operations
From which, it charged off depreciation of RM9 billion
Made total impairments of RM14.9 billion plus a write-off of deposit of RM173 million for the cancellation of its proposed Vietnam oil and gas (O&G) acquisition from Petronas
Earned interest income of RM228 million and paid interest expenses of RM6.4 billion
Received associate income of RM2.3 billion
In total, reported pre-tax losses of RM15.2 billion from continuing operations
Paid taxes of RM1.3 billion
Suffered total net losses of RM16.4 billion from continuing operations
Reported RM3.1 billion in total net profit from discontinued operations, including a gain on disposal, resulting from the sale of 50% of SapuraOMV Upstream Sdn Bhd
Suffered total net losses after tax and attributable to shareholders, from continuing and discontinued operations, of RM13.1 billion
Net debt rose from RM4.9 billion in FY2013 to RM16.4 billion in FY2016, and RM10 billion in FY2022
Net gearing increased from 73% in FY2013 to above 100% annually from FY2014 to FY2022, except for FY2019 (64%) following the RM4 billion rights issue
Equity reduced from RM6.7 billion in FY2013 to just RM254 million in FY2022. At its peak, it was RM13.1 billion in FY2017 (pre-rights) and RM13.9 billion in FY2019 (post-rights).
From FY2013-2022, Sapura Energy generated net excess cash from operations of only RM7.2 billion (barely 56% of Ebitda) but used total cash of RM21.5 billion
This resulted in a cumulative deficit cash flow of RM14.3 billion
It spent a total of RM19.5 billion on capex, acquisitions and investments in joint ventures (excluding debt assumed in acquisitions). Most of this was for the Seadrill (US$2.9 billion) and Newfield (US$895 million) acquisitions.
It paid total dividends of RM480 million to shareholders
The cumulative deficit in cash flow of RM14.3 billion was mainly funded by RM3.9 billion in net proceeds from the rights issue, RM3.9 billion in additional net bank borrowings (excluding debt assumed in acquisitions), net additional income of RM3.6 billion from the sale of 50% of the exploration and production (E&P) business and RM1.6 billion from the private placement in FY2014.
Note that the above statistics include the impact of a private placement in 2013 that raised RM1.6 billion, the rights issue of RM4 billion in 2019, and the disposal of 50% of the E&P business to OMV of Austria for US$975 million in 2019.
Crude oil prices crashed in mid-2014 (see Chart 1). Crude oil prices had been steady, mostly above US$100 per barrel from 2011 to 1H2014, but halved in 2H2014, due to slowing demand, coupled with a sharp increase in supply from the US — thanks to booming shale production — and Organization of the Petroleum Exporting Countries (Opec) production moves, and so on. Oil prices slumped further in 2016 and 2020 before the recent sharp recovery due to the Russia-Ukraine war.
Looking back, the SapuraCrest-Kencana merger was undertaken at the peak of an oil price cycle. Its merger was proposed in July 2011 and completed in May 2012.
However, the merged entity went on to acquire more O&G-related assets and undertook exploration works, all at the peak of the oil cycle. Looking at its books, Sapura Energy paid premium valuations (with large goodwill) and took on large debts. As oil prices fell, the valuation of these assets had to be impaired, while projects suffered losses.
Looking at Sapura Energy’s plight, many questions need to be asked. A key one is — was there a lack of checks and balances within the company?
Sapura Energy was a merger of almost two equals, although Kencana was actually valued slightly higher at RM5.98 billion versus RM5.87 billion for SapuraCrest. However, a series of events in 2013 saw the departure of some of Kencana’s top management, leaving the company almost solely in the hands of president and group CEO Tan Sri Shahril Shamsuddin and his team from 2014 onwards.
Notably, Chong Hin Loon died on Oct 14, 2013, at age 65. He was executive director and executive vice-president, fabrication, hook-up and commissioning, of the merged company. Previously vice-chairman of Kencana, Chong was a seasoned O&G player and the founder of Kencana, which had its roots in Hin Loon Engineering, which Chong founded in 1982 and in which Tan Sri Mokhzani Mahathir invested in 2001.
Key executive directors from Kencana — Mokhzani and Datuk Yeow Kheng Chew, better known as KC Yeow — took a step back on Dec 4, 2013, and were redesignated to non-executive directors. In March 2015, both resigned from the board.
Incidentally, FY2014 was also the year that saw Shahril’s remuneration jump from just RM5 million in FY2013 to a whopping RM81.4 million (and increasing further in later years). That year also saw Sapura Energy embarking on major acquisitions and stretching its balance sheet, just before crude oil prices crashed.
Between FY2016 and FY2022, Sapura Energy made total impairments of a whopping RM14.9 billion (see Table 2). Breaking down the impairments into segmental asset classes, it would appear two-thirds, or some RM9.8 billion, were related to the drilling operations. Another RM3.9 billion were for vessels, engineering and construction (E&C) and E&P, and RM1.15 billion for others.
A closer look at Sapura Energy’s segmental profit and loss shows that most of the losses were indeed from the drilling segment. From FY2015 (when drilling was segmented separately) to FY2022, this division reported total pre-tax losses of RM8.62 billion, while E&C chalked up total pre-tax losses of RM4.05 billion (See Table 3 on Page 59).
In a nutshell, Sapura Energy’s losses were the result of bad strategic decisions and acquisitions, especially the major acquisition of Seadrill’s drilling assets.
In 2013, Sapura Energy acquired Seadrill’s rig and drilling operations for US$2.9 billion (RM8.82 billion), paying with cash, shares and a placement exercise. The acquisition gave Sapura Energy a 55% share of the global tender rig market. Unfortunately, the acquisition severely stretched the company and with the crude oil price crash, drilling activities suffered substantially.
Prior to the acquisition, Sapura Energy owned six tender rigs, five of which were owned and managed through a 51% joint venture with O&G and shipping billionaire John Fredriksen’s Seadrill. The other tender rig, KM1, was wholly owned following the merger with Kencana.
Under the Seadrilll transaction, Sapura Energy acquired an additional six semi-tender rigs and four tender barges from Seadrill as well as the remaining 49% equity interest in the existing five rigs. The number of operating tender rigs owned by Sapura Energy increased to 16, with the number of new builds increasing to five, making it the world’s largest owner of tender rigs.
Seadrill Ltd, the parent company listed in New York and based in Norway, itself has since gone into US Chapter 11 bankruptcy proceedings twice.
Other acquisitions made by Sapura Energy include Newfield’s Malaysian assets for US$895 million in 2014. It had also proposed to purchase Petronas’ Vietnam operations for US$400 million, but the deal was later aborted and Sapura Energy forfeited the 10% deposit, with RM172.5 million recognised as a loss in FY2016.
Note that prior to the merger exercise, Shahril and the former SapuraCrest already had a long history of mergers and acquisitions (M&A). SapuraCrest itself was formerly known as Crest Petroleum and was part of the debt-ridden Renong Group. Sapura Telecommunications acquired a 38.6% stake in Crest Petroleum Bhd from the Renong Group for RM105 million back in 2003 and renamed it SapuraCrest Petroleum.
SapuraCrest went on to acquire 80% of Australia-based Total Marine Technology Pty Ltd in 2005 and Labuan Shipyard and Engineering in 2011, among others. Just before the SapuraCrest-Kencana merger, SapuraCrest in 2011 acquired Clough Ltd’s marine construction and offshore engineering operations in Australia, the UK and the US for a cash consideration of A$127 million.
Incidentally and despite high crude oil prices then, Clough’s marine construction business that was to be acquired suffered a net loss of A$10.4 million in the financial year ended June 2011, according to SapuraCrest Petroleum’s circular to shareholders dated Nov 29, 2011. According to the circular, the Clough acquisition would have resulted in a loss of RM52.7 million for SapuraCrest Petroleum, from the A$10.4 million (RM33.7 million) net loss and RM19 million for expenses relating to the acquisition.
With these acquisitions, Sapura Energy’s geographical reach, as well as risks, expanded. In FY2013, the company derived 81% of total revenue from Malaysia. By FY2016, this ratio had dropped to 39%, and was 38% in FY2022 (see Chart 2).
The SapuraCrest-Kencana merger was structured to benefit shareholders of both SapuraCrest and Kencana, rewarding them with huge cash payouts funded by bank borrowings.
The newly merged company was saddled with extra debt during its restructuring exercise, with an extra RM1.96 billion of bank borrowings added to the merged entity, specifically for cash payments to shareholders of SapuraCrest and Kencana. As part of the exercise, shareholders of both companies received a total of RM1.84 billion cash, comprising RM875.08 million for shareholders of SapuraCrest and RM968.69 million for shareholders of Kencana.
Shahril had held a 40% stake in SapuraCrest and would have received an estimated RM350 million in cash payout for his stake in the company, apart from the shares in the merged entity — Sapura.
In the first post-merger quarterly financial statement, on July 31, 2012, the merged entity had gross borrowings of RM5.33 billion and cash of RM1.46 billion. Net debt was RM3.87 billion versus equity of RM6.45 billion, or a net gearing ratio of 60% — even before it embarked on several major acquisitions.
With a high starting debt level, the company went on to add even more borrowings through several major acquisitions, notably Seadrill’s rig operations and Newfield’s Malaysian oil assets — all in the space of a year and right at the peak of the crude oil price cycle.
Net debt jumped from RM3.87 billion (net gearing ratio: 60%) in July 2012 to RM4.92 billion (gearing: 73%) in FY Jan 2013; RM10.97 billion (gearing: 108%) in FY2014; RM15.7 billion (gearing: 131%) in FY2015; before peaking at RM16.38 billion (gearing 134%) in FY2016 (See Chart 3). Net gearing ratio crossed 100% in January 2013 and has not subsided.
Net debt eased in FY2019, falling to RM8.89 billion from RM14.7 billion in FY2018 following the RM4 billion rights issue and sale of 50% of SapuraOMV. Net gearing then was 64%, but it was not enough to address the issues, and net debt and gearing started to balloon again. As at January this year, Sapura Energy’s net debt was RM10 billion versus equity of only RM254 million.
Another question to ask is why banks aggressively funded so much of Sapura Energy’s expansion, especially when the company’s gearing ratios were already so high.
From FY2013-FY2022, Sapura Energy paid out total dividends of RM480 million. But huge salaries, incentives and payments were made out to Shahril and his vehicle Brothers Capital Sdn Bhd (co-owned with his brother Datuk Shahriman Shamsuddin), which wholly owns Sapura Holdings Sdn Bhd, which in turn now owns 12.82% of Sapura Energy.
Shahril drew huge remuneration and incentives from FY2014 onwards, even as the company posted losses from FY2016. His annual remuneration and incentives were between RM71.9 million and RM89.4 million from FY2014 to FY2018 (see Chart 4). His total income from FY2013 to FY2021 was RM443.9 million, or an average of RM49.3 million per year for nine years.
In FY2016, when Sapura Energy posted its first post-merger loss, Shahril’s remuneration was still a whopping RM83.4 million, down only marginally from the RM89.4 million in FY2015 when both Sapura Energy’s profits and his remuneration were at record highs. In FY2018, the company posted RM2.5 billion of net losses, but his remuneration was still a whopping RM71.9 million.
Apart from high salaries and incentives, there were also other forms of related-party transactions, with substantial payments made by Sapura Energy to both Sapura Holdings and Sapura Resources Bhd (a separate listed company controlled by Shahril and Shahriman), which owns an office building rented to Sapura Energy.
A notable feature was “intellectual property rights, trademarks and branding” fees, which totalled RM62.5 million in FY2013 and RM70 million a year in FY2014-2018 to both Sapura Energy and Kencana’s major shareholders (see Table 4).
From FY2013-2021, the company paid out RM438.4 million in such fees, of which RM295.8 million went to Sapura Holdings and RM142.7 million to Kencana Capital Assets. There was also total office rental of RM149.4 million paid in FY2013-2021 to both Sapura Resources and Kencana Capital Assets.
In total, excluding the related-party transaction office rental, we estimate Shahril and Shahriman’s Sapura Holdings received RM1.17 billion from FY2013-2021, comprising RM444 million in remuneration, RM296 million in IP rights and trademarks, RM350 million from the SapuraCrest-Kencana merger cash distribution exercise and RM79 million from dividends (See Table 5).
In comparison, all shareholders (excluding Shahril and Sapura Holdings) received just RM401 million in dividends. To cut a long story short, one single shareholder received three times what was paid to all other shareholders.
This amount of RM1.17 billion received by Shahril personally and with Shahriman’s companies, is equivalent to a hefty 9.2% of Sapura’s total Ebitda of RM12.7 billion earned over the past 10 years.
Related-party transactions (RPTs) between public-listed companies and their major shareholders are by themselves not illegal or necessarily bad. But they are often frowned upon as they could create conflicts of interest. Hence, the nature, amounts and basis for such RPT charges should be fair, reasonable and transparent.
In the case of Sapura Energy Bhd, it has a slew of RPTs as already noted in the main story.
The biggest of these are “intellectual property rights, trademarks and branding” fees payable to both Sapura Holdings Sdn Bhd and Kencana Capital Sdn Bhd, the unlisted parent companies owned by the major shareholders of the two entities — Tan Sri Shahril Shamsuddin and Tan Sri Mokhzani Mahathir — prior to the SapuraKencana Petroleum merger.
From FY2013-2021, since the Sapura Kencana merger exercise was completed in 2012, Sapura Energy paid RM295.8 million to Sapura Holdings for “IP, trademarks and branding” fees. The annual fees were as high as RM43.4 million in FY2014-2018, before being reduced to RM10 million in FY2020-2021. Sapura Energy also paid a total of RM142.7 million to Kencana Capital for these fees from FY2013 to FY2018.
What exactly are these “IP, trademarks and branding” fees? Does it imply that Sapura Energy does not wholly own all the IP rights, trademarks and branding associated with its business or operations, or do they partly belong to their major shareholders in their personal capacity? This is a question minority shareholders should ask.
Sapura Energy also paid a total of RM149.4 million in office rental over the same nine-year period to both Sapura Resources Bhd and Kencana Capital Assets Sdn Bhd.
In FY2021, the office rental paid by Sapura Energy to Sapura Resources was RM17.6 million, as Sapura Energy’s offices are located at the [email protected] building in Mines Resort City, Kuala Lumpur. The 22-year-old building is owned by Sapura Resources, which is also listed on Bursa Malaysia.
While no disclosures were made about the amount of space leased and rental rate, it is worth noting that Sapura Resources in the financial year ended January 2021 generated revenue of RM25.87 million for its property investment division, which consists of four assets: the [email protected] building (net book value: RM115.9 million, albeit not revalued since 1999), two warehouses and a building (collectively RM5 million in NBV).
These disclosures suggest that Sapura Energy’s rental of RM17.6 million accounts for 68% of Sapura Resources’ total property investment income of RM25.9 million. With a NBV of RM120.9 million for its property portfolio, Sapura Resources generated an implied rental yield of 21.4%.
In July 2018, The Edge interviewed Tan Sri Shahril Shamsuddin, the then president and CEO of oil and gas company Sapura Energy Bhd.
A large part of the interview revolved around Shahril’s high remuneration, which according to him and Sapura Energy’s independent directors, was in line with international standards, but exorbitant from a Malaysian perspective.
While Shahril did not speak on his pay package and remuneration, Sapura Energy’s then chairman and non-independent non-executive director Datuk Hamzah Bakar, who was also chairman of the board remuneration committee, and then independent non-executive director Gee Siew Yong, who was chairman of the board audit committee, defended his high salary. Both were present at the interview.
To put things in perspective, in FY2018, Shahril took home RM55 million in bonus payments and RM16.56 million in salary and other emoluments. There were also intellectual property rights payments of RM43.4 million to Sapura Holdings Sdn Bhd, a company controlled by Shahril and his brother Datuk Shahriman Shamsuddin, a non-independent non-executive director of Sapura Energy.
In a nutshell, Sapura Energy forked out close to RM115 million to Shahril in a financial year when the company suffered a net loss of RM2.5 billion from revenue of RM5.89 billion.
Shahril’s pay package and incentives came under the scrutiny of shareholders, including the Employees Provident Fund, which voted against the reappointment of all the company’s directors, including Shahril, at the company’s annual general meeting in July 2018. However, the bid to oust Shahril failed as he received 81.71% of the votes to remain as president and CEO. EPF had sold down its shareholding in Sapura Energy and ceased to be a substantial shareholder in the company in May 2018, two months before the AGM.
However, it was highlighted during the 2018 interview with The Edge that any move to oust Shahril from the board would have adverse consequences, as Sapura Energy’s 14 bankers had a covenant on a RM16 billion refinancing package put together in 2014 that required Shahril to maintain his shareholding at above the 10% bracket and remain as CEO, failing which there would be a default.
Hamzah sought to explain Shahril’s high remuneration: “The bonus for performance in FY2017 (ended Jan 31, 2017) was paid in April 2017. We can’t put it in the FY2017 accounts, so we put it in the FY2018 accounts. But unluckily for us, we suffered a loss in 2018. So it looks like we paid a bonus when we made losses … It just so happens that in 2017, we made profits. It (the bonus) is not just (based on) financial (results). We have business development, we have cost savings, strategy, restructuring, business opportunities, new contracts won and so forth. All those count … so, it’s unfortunate.
“The other element that nobody wants to acknowledge, although we have told them, is the long-term incentive plan. Say for 2017, we paid 50% of the allocated amount, the rest is in the following two years. If the following two years are loss-making, you still have to pay. The rationale for deferring is so that he (Shahril) stays,” Hamzah had said.
However, the explanations given by Hamzah and Gee did little to lessen unhappiness over Shahril’s pay.
Following are excerpts from the interview three years ago.
The Edge: So, you believe Tan Sri Shahril’s salary and remuneration are fair?
Datuk Hamzah Bakar: Fair, given all the factors we have to take into account.
But then, how much salary would he (Shahril) draw when the times are good? This, we hear, was brought up by some shareholders (during the AGM). They asked, if I’m not mistaken, if it would be RM200 million to RM300 million ...
Gee Siew Yong: We — I speak as an independent director — have our own fiduciary duties, and we have a structure within Sapura Energy that respects that, so even if he is going to be paid RM200 million to RM300 million, it has got to go through the due process. We have a remuneration committee, we have independent directors on the board, we all have to be convinced first. It’s not like when the oil price goes up, it’s automatic (he gets higher pay).
We know our fiduciary duties, we know our limitations, we abide by the rules of the exchange. We didn’t just pluck the figure — RM55 million. There was a basis (at arriving at the figure) and that went through our corporate governance process.
In 2014, which is FY2015, oil remained at US$100 until October. That year we made a profit after tax of RM1.4 billion, and Tan Sri was not paid a lot more. It didn’t triple to RM200 million to RM300 million.
Is it an issue that there are no dividends?
Gee: They (the shareholders) understand …
Some feel that maybe he should not get such a high salary but suffer with the other shareholders ...
Gee: What do you mean by suffer?
The share price being battered and no dividends paid …
Gee: No dividends is across the board, and we can understand. But this company, at this time, cannot pay a dividend, but when we can, we try to. When we look at our results, we go through them with management … one of the items on the agenda is, are we paying a dividend? And the explanations come … it’s not like we ignore the shareholders and don’t think of dividends.
Hamzah: It is prudent financial management. Over the past few years, all the growth trajectory, the acquisitions, were made without any cash call to the shareholders. There is no dilution, which is how the company was built. We built the business without taking money from the shareholders.
Gee: All the bank borrowings have been put into the company for real physical assets.
Could you elaborate on the intellectual property payments?
Gee: There is always an annual review of benefits and services rendered, albeit, the bundle of services would repeat. Brand Finance and PwC looked at the intellectual property but PwC, from a tax perspective. But both did not come out with the same figure as they have different methodologies of calculating. But we used the lower of the two.
The intellectual property fees were presented and approved. How it works is that if Sapura Energy does not want to pay annual fees, they can pay a one-off US$230 million to take the brand off Sapura.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.