This article first appeared in The Edge Malaysia Weekly on April 25, 2022 - May 1, 2022

MALAYSIA has a tendency to create “national champions” or “national icons”. These are select groups of personalities or companies chosen to make the nation proud. They are often given a slew of preferential treatment, privatisations and incentives to shape Malaysia’s corporate sector — for better or for worse.

Is Sapura Energy Bhd a “National Icon”? Is it a company that is valuable and strategically important for Malaysia and hence, deserves to be bailed out using public money? Does it give Malaysia a national competitive advantage? Let us look at some facts and figures.

Sapura Energy came from the merger of SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd in 2012. Prior to the merger, SapuraCrest specialised in exploration, offshore installation and offshore support vessels, while Kencana’s strength was in design and engineering, fabrication and hook up and commissioning. Following the merger, the company offered a fuller range of services in the engineering, procurement, construction, installation and commissioning value chain.

There was not much duplication in the merger as both companies had different strengths. But there was one common feature: both companies made their fortunes almost wholly in Malaysia, in a protected domestic market dominated by national oil giant Petronas Nasional Bhd. In FY Jan 2012, the company derived a significant 94% of revenues from Malaysia.

Sapura Energy’s problems began when it embarked on an aggressive acquisition spree and global expansion exercise. It wanted to be a big global player, but in a very competitive field. Four years later, in FY2016, when Sapura Energy posted its first loss, Malaysia’s contribution to its revenue had declined from 94% to 39%, while overseas revenue surged from 6% to 61%. It would appear the company did not compete well globally, outside of Malaysia.

From a starting valuation of RM11.85 billion in May 2012, Sapura Energy’s market capitalisation doubled to RM28 billion in early 2014. The growth was not organically driven. It was not driven by generating more profits from assets, but from large acquisitions, notably the purchase of Seadrill Ltd’s drilling operations for US$2.9 billion and Newfield International Holdings Inc’s Malaysian assets for US$895 million.

These acquisitions boosted Sapura Energy’s assets and earnings immediately, giving a quick boost to stock prices. However, they were made at the top of the oil and gas cycle. When oil prices collapsed, so did earnings and the value of these assets, resulting in huge losses and asset impairments.

A company can be grown very quickly if one is willing to spend to buy assets at top dollar. Sapura Energy spent US$3.8 billion in a year to acquire the Seadrill and Newfield assets. Just prior to the merger, it had also acquired Clough Ltd’s marine construction assets for A$127 million. In 2014, Sapura also planned to buy Petronas’ interest in three offshore Vietnam blocks for US$400 million. This was later aborted, and the company lost its US$40 million deposit.

Who funded all these major expansions? The banks.

As part of the merger exercise, Sapura Energy borrowed RM1.96 billion for cash payments totalling RM1.84 billion to shareholders of both SapuraCrest and Kencana. The merged entity had, on July 31, 2012, net debt of RM3.87 billion and 60% net gearing.

After the acquisitions, Sapura Energy’s net debt ballooned to RM10.97 billion in FY2014, RM15.7 billion in FY2015 and RM16.38 billion in FY2016. Net gearing was between 108% and 134%. Even after the RM4 billion rights issue and sale of a 50% stake in SapuraOMV Upstream Sdn Bhd for US$975 million, net debt remained high at RM10 billion in FY2022, versus equity of only RM254 million.

Why did banks fund so much of Sapura Energy’s aggressive expansion exercise? It is interesting to note that the company depended more on banks for funding than from its shareholders or the capital markets. There was only one private placement exercise, an issue of shares to Seadrill for part-payment and the RM4 billion rights issue (funded mostly by Permodalan Nasional Bhd), in its 10-year history.

As noted above, banks were the main funders of its expansion exercise — and as a consequence, are likely to suffer haircuts on their net debt exposure of RM10 billion at end-FY2022. For all their loans, the company paid RM6.4 billion in cumulative interest expense over the last 10 years.

The original shareholders of SapuraCrest and Kencana received total cash payments of RM1.84 billion as part of the merger exercise. Shareholders of Sapura Energy have received a total of RM480 million in dividends since then, but have suffered huge equity losses as its market capitalisation plunged from a peak of RM28 billion in 2014 to just RM639 million. PNB in particular suffered almost 90% fall in the value of its additional RM2.7 billion investment in the RM4 billion rights issue just three years ago.

The biggest beneficiaries are ironically two major foreign parties — Norway-based Seadrill and US-based Newfield. They sold their assets to Sapura Energy for a total of US$3.8 billion at the peak of the oil cycle. Effectively, the huge sums of money borrowed by Sapura went overseas.

Seadrill made additional gains when it sold its stakes in Sapura Energy in 2014 and 2016. Tan Sri Mokhzani Mahathir also disposed of most of his shares in 2014 and 2017.

Tan Sri Shahril Shamsuddin controlled Sapura Energy with a stake of roughly 16.8% in FY2013-2015 and 17.4% in FY2017-2018, before it was diluted to 13.9% in FY2019-2022 after the rights issue. While the value of his stake has plummeted, he had earned substantial income from his remuneration as CEO, as well as other related-party transactions (see main story and “Sapura Energy’s slew of RPTs raises questions” on next page).

For the nine years from FY2013 to FY2021, Shahril’s total remuneration was RM443.9 million. During that time, Sapura Energy paid “intellectual property rights, trademarks and branding” fees totalling RM438.4 million, of which RM295.8 million went to Sapura Holdings. There was also total office rental of RM149.4 million paid to both Sapura Resources and Kencana Capital Assets.

In total, excluding the office rental, Shahril and Sapura Holdings Sdn Bhd received RM1.17 billion from FY2013 to 2021, comprising RM444 million in remuneration, RM295 million in IP rights and trademarks, RM350 million from the merger cash distribution exercise and RM79 million from dividends.

In arriving at a critical decision of whether or not to rescue a company, we have to see its track record and whether there is a visible and sustainable turnaround plan.

It is easy to blame low crude oil prices for Sapura Energy’s problems. However, crude oil, as with any commodity, is cyclical. Managing a company dependent on commodity prices requires a certain degree of financial prudence to weather cyclical downturns and the ability to predict cycles.

Is there a visible and sustainable turnaround plan? With crude oil prices hovering around US$100 per barrel, prospects for the oil and gas sector are better. But in its present dire financial predicament, the company will not be able to do much, if anything, at all.

A prized jewel is its 50% stake in SapuraOMV, in partnership with Austria-based OMV Exploration & Production GmbH. Sapura Energy had sold a 50% stake in this company for US$975 million to OMV back in January 2019 when crude oil prices were hovering around US$60 per barrel. The stake could be worth more in the current high oil price environment.

Notably, Sapura Energy’s share of profits from associates and joint ventures (which includes the SapuraOMV stake) is still positive and substantial, totalling RM84.2 million in FY2022 and RM158.8 million in FY2021. This is in stark contrast to the poor performance of its own operations.

A potential sale of the remaining 50% stake in SapuraOMV, however, may cover only 45% to 50% of Sapura Energy’s debts. For the company to be viable post-restructuring, all current stakeholders may have to “pay” and take big haircuts, including the banks and shareholders.

We believe the rescue of Sapura Energy should be led by the private sector, with private sector investments. It should not be rescued using government or public funds. Let the current shareholders and lenders take their haircuts. They will be more financially responsible in the future.

The private sector will ensure that the future business model of Sapura Energy will be profitable and sustainable, and that the interests of all stakeholders will be better and properly aligned.

We have already had many examples of bad government bailouts. Many companies that originally failed were bailed out by the government not only once, but needed further bailouts, assistance and use of taxpayers’ funds. These include the multiple bailouts at Bank Bumiputra, Perwaja Steel and Malaysia Airlines.

On the other hand, we have a positive recent precedent with Proton Holdings. After many government attempts that failed, Proton is now a profitable company with private sector management and financing. This followed the entry of China’s Geely Auto Group, which acquired a 49.9% stake in 2017.  Government bailouts rarely succeed, as the numerous attempts with Malaysia Airlines have shown.

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