This article first appeared in The Edge Malaysia Weekly on December 3, 2018 - December 9, 2018

THINGS have been hectic for oil and gas outfit Sapura Energy Bhd, especially in the past few weeks, with a slew of important announcements made to the local bourse.

There has also been a lot of market talk of large contracts coming the company’s way. For example, its unit TL Offshore Sdn Bhd is said to be on the verge of securing a PAN Malaysia deal for offshore transport and installation work.

However, all this did nothing to lift the company’s share price. It closed at 35.5 sen last Friday, translating into a market capitalisation of just above RM2 billion — a far cry from the RM30 billion mark tested 4½ years ago. In fact, the stock has shed more than 70% of its value in the past 12 months.

“The share price is the share price; once we start earning, it will change. If the market cannot, for whatever reason, understand that there is a business vertical with an enterprise value of RM6.6 billion [coupled] with our E&C (engineering and construction) order book of RM18 billion, what can we say?” asks Sapura Energy president and CEO Tan Sri Shahril Shamsuddin, in an exclusive interview with The Edge.

“At the beginning of next year and (over the) next couple of years, you will see a ramp-up in turnover, a ramp-up in Ebitda, a ramp-up in many things,” he adds.

Indeed, some of the announcements indicate good times ahead for the oil and gas company but there is still some scepticism.

To recap, in the middle of last week, Sapura Energy announced that its units Sapura Fabrication Sdn Bhd and Sapura Saudi Arabia had been selected by the Saudi Arabian Oil Company (Saudi Aramco) for a long-term agreement (LTA) programme. This would enable the group to secure engineering, procurement, construction and installation (EPCI) contracts to support Saudi Aramco’s offshore projects, which could be a lucrative proposal.

A couple of weeks ago, the company secured RM1.75 billion worth of engineering, procurement, construction, transport and installation work in the Hokchi field development and Offshore Block Area 1 in the Gulf of Mexico and a contract for underwater services for several contractors in Malaysia.

Perhaps the icing on the cake for the group was when shareholders last week approved a cash call — a rights issue of almost 10 billion new shares at 30 sen each with warrants as a sweetener and almost 2.4 billion Islamic redeemable convertible preference shares (RCPS-i) at 41 sen apiece — to help raise almost RM4 billion to pare down its debts.

With the rights issue, Permodalan Nasional Bhd (PNB) will be the dominant shareholder with about 40% equity interest in Sapura Energy from the present 11% or so. Shahril would have about 10%, down from his present 17.44%.

Sapura Energy also announced the proposed sale of a 50% stake in its exploration and production unit for possibly US$800 million or RM3.32 billion cash to Austrian stalwart OMV Aktiengesellschaft recently.

The many deals clinched by Sapura Energy are in contrast to the predicament of many other oil and gas players that are still reeling from the effects of oil prices crashing from US$146 per barrel in July 2008 to a low of US$28 in January 2016.

On Sapura Energy’s aggressive moves, when its peers are lying low, waiting for the tide to turn, Shahril says, “I have always believed that the best defence is offence … we did not sacrifice our turnover; we continued to invest in infrastructure.”

The question is, will all this translate into a stronger bottom line for Sapura Energy?

The all-important bottom line

Shahril has said Sapura Energy will turn the corner in FY2020. This is despite the company suffering a RM2.5 billion net loss on revenue of RM5.89 billion in its financial year ended Jan 31, 2018.

“Recovery is always gradual. We are booking in contracts now; our order book jumped quite significantly this year from RM14 billion to RM18 billion, and it’s still growing. So these new contracts will start the engineering phase and the procurement phase before the execution phase is ramped up, where utilisation and profitability will come,” he explains.

Much of the recovery revolves around the company cleaning up its balance sheet.

In its first six months of FY2019 ended July, it suffered a net loss of RM261.79 million on revenue of RM2.31 billion. As at end-July, Sapura Energy had cash and cash equivalents of RM994.23 million while on the other side of the balance sheet, it had long-term debt commitments of RM11.12 billion and short-term borrowings of RM5.75 billion. In 1HFY2019, Sapura Energy forked out RM475.03 million in finance costs.

Post the cash call and the sale to OMV, the company’s gearing will be reduced to 0.62 times from 1.74 times.

It is also noteworthy that Sapura Energy’s order book stands at around RM18 billion, which should keep the company busy for the next three to four years.

“People only look at the short term but if you were to look at the order book, it’s at RM18 billion and still growing. This will translate into cash through profitability going forward,” Shahril points out.

The LTA with Saudi Aramco is likely to play a big role as well. While Shahril and Sapura Energy have kept mum about the implications of the LTA, it could turn out to be quite a coup.

The company is one of nine players that can undertake work under the LTA. Of the others, the new players are Offshore Oil Engineering Co of China; a joint venture involving United Arab Emirates’ Lamprell and Netherlands-based Boskalis; and a consortium comprising the UK-based TechnipFMC and Malaysia Marine and Heavy Engineering Holdings Bhd. The five incumbents are Italy’s Saipem, McDermott International and Dynamic Industries of the US, a partnership between India’s Larsen & Toubro with Norway’s Subsea 7 and Abu Dhabi’s National Petroleum Construction Co (NPCC).

According to news reports Lamprell and Boskalis have said that within the scope of the LTA, investments by Saudi Aramco could exceed US$3 billion per annum. But judging by news reports from the region, the US$3 billion could be a conservative estimate.

It is known in oil and gas circles that Saudi Aramco is tendering out jobs for its Marjan project that could be in excess of US$5 billion.

At the event announcing the LTA, Saudi Aramco chief executive Amin Nasser said the company had signed 31 deals worth a total of US$27.5 billion but did not elaborate.

Saudi Aramco has said in the past that its gas programmes will attract investments of US$150 billion over the next decade as it aims to almost double its gas production to 23 billion cubic ft per day (bcfd) from 14 bcfd.

At present, Saudi Aramco has 16 drilling rigs focused on its unconventional gas reserves, and more than 70 wells are expected to be completed this year as part of Amin’s plan for Saudi Aramco to produce up to 3 bcfd of gas by 2030 from its unconventional reserves.

According to data from Sapura Energy, only RM500 million of its existing RM18.2 billion order book is from the Middle East, Europe and Africa (see illustration). This indicates that there is still room for the company to grow.

Documents from a Sapura Energy analyst briefing show that there are 14 projects worth US$3.9 billion in Saudi Arabia, Qatar and UAE. Almost all analysts are positive on Sapura Energy’s prospects, although some market watchers have drawn a parallel between the company and Velesto Energy Bhd — an oil and gas outfit in which PNB has 38% equity interest.

In any case, it will be clear in a matter of months if Sapura Energy is out of the woods, and if Shahril’s moves have borne fruit or become a thorn in PNB’s side.

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