This article first appeared in The Edge Malaysia Weekly on November 1, 2021 - November 7, 2021
SAPURA Energy Bhd CEO Datuk Mohd Anuar Taib met The Edge at a coffee place in the heart of Kuala Lumpur last week.
Although it is close to 3pm, he has yet to have his lunch and orders a slice of pie, eating it with relish. “I have been very busy,” he explains.
The late lunch is not a surprise considering the task he has at hand — turning around the ailing oil and gas giant. In the nearly two-hour-long interview, Anuar explains why Sapura Energy is sinking deeper into financial troubles even as it deals with the impact of the pandemic, and the measures being taken to revive the debt-laden group that has taken big risks to secure projects that might not yield good profits.
Here are excerpts from the interview.
The Edge: The second quarter results came as quite a surprise.
Mohd Anuar Taib: Yes, I think maybe the market was surprised. There are a few things that came into play. One is Covid-19 — today we have accumulated RM400 million to RM460 million direct costs, these are quarantine costs, crew costs.
The Lumut yard had been shut down about five times. All in all, including the first MCO (March 2020), it was roughly around 5½ months [of shutdown] in total. The last reopening, we could only operate at 60% [capacity]. What all this means is that the progress of projects were definitely impacted.
So all this contributed to the loss of RM1.52 billion?
(Yes.) When vessels are quarantined, even if they have a job somewhere, [for) all the supporting equipment on the vessel, we have to pay rent, the day rate still continues. And as far as the client is concerned, that is not their problem. So, now, this is where we have accumulated up to RM460 million in Covid-19 costs, which we are now meaning to claim from the clients.
A lot of the projects we are running today were won back in 2019, 2020, (so) many of them had no Covid-19 provisions. And the clients as well, they did not budget for them either.
So you are in talks now to claim from your clients?
Yes, we are. Today, we have about RM400 million, and then you add the consequential [costs], the total is between RM800 million and RM1 billion.
Market talk has it that Sapura Energy needs an immediate injection of RM700 million to RM750 million to actually pay its subcontractors. Is this accurate?
I think we do have issues with liquidity. If you have been paying and not have revenue coming in, it’s a challenge. What’s important for us is actually to maintain the continuity and sustainability of our business.
What I want to do is a fundamental shift in our approach, so that we go back to managing our cash, looking at our balance sheet, profit and loss, and project delivery so that we can actually start paying dividends in the coming times.
And then Covid-19 hit, demand went down even more, and Covid-19 added costs which we did not anticipate. These are the things that I have to deal with now.
For ongoing projects that you have yet to get payment from clients, how much is it?
We do have RM1 billion worth of contractual claims … change orders, that’s the one we are working with our people and our clients. RM400 million worth of Covid-19 claims, that is with 60 clients.
Besides Covid-19-related costs, are there any other factors affecting financials? Say, for example, contracts that you secured years ago.
Taiwan and India … Taiwan, we were awarded in 2019, ready for deployment in 2020, but the vessel we allocated — LST3000 — had an issue, the crane was damaged. So we had to change the vessel, and once we put Sapura 3500 in place, it was almost winter. We couldn’t work through winter but we had to remain there.
[In] India, the facilities we are building today is almost twice the size that we bid for. Again, we are having a conversation with our client.
So this is why we put in significant foreseeable losses in our reports for Taiwan and India.
Would you say that these issues are due to unforeseen factors — all these terms were not included when the contract was negotiated?
Yes. In essence, if you are going to build a platform, you need to know where it is, soil conditions, metocean conditions, construction methods, these things have to be put in place. [But] Many things can change.
We are more exposed than many Malaysian O&G contractors because we have a breadth of things that we do. And also the geographical areas that we are in. We are not just exposed in Malaysia.
Some analysts suggested that perhaps the reason for some of the hiccups in Taiwan is because of the land condition or the subsurface condition.
I think that’s part of the discussion … there are many factors.
Some say that the issue with Sapura Energy is that jobs were bid at a very low price, and this is partly because certain quarters received finders’ fees and commissions. And eventually, the company will just go in for any job, which is why at such high oil prices, Sapura Energy is not making money.
I don’t think that’s correct. That’s why we did reviews of all the projects that we got. What we can admit to is that I think we could do better with risk management.
We need to start looking at not only winning bids, but also whether a contract is onerous, so difficult.
It is less important to talk about your bid book. It is more important to look at risks that you need to mitigate once you turn it into order book.
Sapura has seen challenges with its first renewable project Yunlin. You are bidding for five or so similar projects. How do you see it moving forward?
In essence, if one lesson learnt makes you become allergic to the whole system, then you shouldn’t be [doing this business].
How’s the replenishment of your order book then?
Our order book today is at about RM7 billion. It is quite healthy. The shift we are making is this — the order book is [less important than] how much Ebitda (earnings before interest, taxes, depreciation and amortisation) we can generate from it.
If I want to be reckless, I could get the RM10 billion in revenue but nothing to show. That’s not sustainable. We need to shift Sapura from having an entrepreneurial approach to becoming an institution.
How much of the RM7 billion order book actually gives you very low Ebitda margins, or is even loss-making?
When you do project review, it’s always on things that you have done. You ask questions on why you lose [in certain projects], is it because of bid margin or risk management?
The majority of things we discovered involve inconsistent risk management. It comes in many ways, you look at operating conditions, you work in certain countries that require use of certain ports or services. Managing yards in different countries involve different labour laws.
So we also shifted — if it’s a construction in a foreign country, we are not going to come in as a main contractor. Let those who are better [there] do it, we come in maybe as a consortium partner or we become a subcontractor for transportation and solutions. You look at different ways of managing things.
When you say you are going to be more selective in bidding, does it mean revenue is going to be less?
Not necessarily. It will become clearer — going forward, we are going to be more transparent in the things that we do.
Is Sapura Energy’s relationship with Petronas all right?
Forty per cent of our revenue is in Malaysia. And in Malaysia upstream, Petronas approves the payments. I don’t really see any issue.
What we heard was that Sapura Energy was hoping for more assistance from Petronas, and Petronas was not forthcoming ...
I think we can’t [hope for that]. They are the custodians, they create an environment where investment continues, work continues and we compete for [the jobs]. What we need help [for], in times like this, is to ask their team to expedite valid claims.
Will there be more surprises after the second quarter results?
We don’t want a surprise, but even a week ago when we mobilised one of our rigs from Brunei to Malaysia, that rig had to be quarantined for Covid-19 … I think the circumstances are different.
How dire is the situation, the need for funds, capital injection?
I think we are quite okay. We are trying our best.
Is there a figure on how much you need to raise to settle your payments to subcontractors?
We are working through it, but I’m not sharing it with you.
Does Sapura Energy need another round of recapitalisation, especially after the latest round of quarterly results?
We still have ongoing business. We are putting lots of effort to get ourselves healthier. We are working with clients, shareholders … We are negotiating with clients. Those things are continuing. We will see. I think this is part and parcel of the journey to become healthier. It is still too early to say what will be the outcome of all the conversations we are having.
The refinancing earlier this year is sufficient?
Yes, we have 2½ years of [principal payment moratorium], that leaves us with around RM460 million to RM480 million a year [in interest payment]. But in my mind, it is not sustainable for us. We really have to work on how to pare it down.
You mentioned there is a short-term liquidity mismatch. You mentioned it is too early to see whether you need recapitalisation. What will determine that?
As it is, I think it’s too early to say anything. In essence, there are many things we can do to solve that. Today, the entire contract value or change order contract claim is around RM1 billion. There are a lot of opportunities there for us to [get that back].
You’re looking at asset divestments?
We look at utilisation first, I look at what company I want to be, the business that we are good at, what doesn’t fit.
You are an oil and gas man, how challenging has it been at Sapura Energy?
Different jobs come with different challenges. It’s not about me; my job is to be the glue that holds everybody together.
Is a name change in the pipeline?
I think that’s not high on my agenda for now. If I change the name and still have the same underlying performance, it doesn’t matter, does it?
You’re confident you can do it?
If you are always confident, that means something is wrong.
Do you see the price of oil maintaining?
If I were to look at it in the short run, my expectation is it goes up, because if you look at the past five years, there’s a significant underinvestment in this sector. So, we have not been increasing the supply — demand is going to pick up.
You joined almost a year ago, how committed are you to this job, given that it is a very challenging job in terms of the industry landscape? The company itself has lots of internal issues to resolve.
I’m 53 this year, so still have a bit more room to grow. I enjoy this job. Organisationally, it has its complexities, but for me, it also has a lot of simplicity.
Everybody comes from outside, so there’s no such thing as “are you home-grown or are you an external hire?”, everybody is externally hired. But, we have to go through a challenging period in the next few months.
You mentioned that PNB (Permodalan Nasional Bhd) as a shareholder is very supportive. What does that mean?
For me, I would look at it, [as] they stayed with us through thick and thin. Very supportive throughout the refinancing, and then for me, they do what shareholders usually do. Provide you with advice, provide you with leads.
How much does it help having PNB as your controlling shareholder when it comes to obtaining financing facilities?
I think the lenders would be looking at us as a company. Having PNB as a 40% shareholder provides them with confidence. I think that’s usually the case, but item No 1 is that I must prove, must show, to the lenders that we have a credible plan, we have a credible business model, and we intend to deliver it. And I know that one of the things that happened for us is that the second quarter results dented our credibility.
So for now, the priority is to manage the cash flow?
In essence, we are going to go back to just the fundamentals of business. Look at cash, clean up the balance sheet, [look at] project delivery, look at risk management framework, just keep doing that, and you try to do it fast enough so that this big ship can be turned around.
What do you have to say to the shareholders, who had actually been committed to the rights issue three years ago and they are still holding onto their shares, and subscribed at 30 sen?
I think the message is exactly the same, “thank you very much for keeping trust with us”. The management is committed together with the board, committed to improving the underlying performance of the company and we are working with all the shareholders/stakeholders that we have, clients, our vendor ecosystem, lenders … You can’t say beyond that.
They must have heard a lot of promises over the many years. My focus is let’s promise less, do more and then let them see.
I guess I’m less of an M&A (merger and acquisition) person, I’m more of a delivery person. Different companies are in different stages. At a certain point, you have to start changing it to a delivery machine, there’s a different kind of leadership that is needed.
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