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This article first appeared in The Edge Malaysia Weekly on December 13, 2021 - December 19, 2021

WITH the cash flow problems at Sapura Energy Bhd out in the open, the focus has switched from the ailing oil and gas services company to its 40% shareholder Permodalan Nasional Bhd (PNB), and whether the state-controlled unit trust company will inject more funds into the former.

To recap, last Tuesday, Sapura Energy’s stock hit a historical low of 4.5 sen in intraday trade, slipping from its close of eight sen the day before. Its shares had yet to recover on Friday, ending the day at 5 sen, which translates into a market capitalisation of RM799 million for the company.

The reason for the pessimism over Sapura Energy may stem from a number of factors, one of which was a report early this month that it had failed to qualify for phase two of Petroliam Nasional Bhd’s (Petronas) Kasawari front-end engineering and design contract. The report, published by industry news portal Upstream, said financial issues were a key reason for its exclusion.

A further body blow came after UOB KayHian changed its call on Sapura Energy to “sell” from “hold”, and slashed its target price by 70%, from 10 sen to three sen.

UOB KayHian wrote: “We foresee further selling pressure given rumours of its distress and urgency to sell assets … The timeline to review covenant waivers is nearing, a low likelihood of selling assets at a decent price, continued losses, and potentially lower leverage to renegotiate covenants after changes in key personnel.

“While developments may be choppy, we assume a worst-case bankruptcy scenario,” the research house said.

In response, Sapura Energy, in a Dec 8 statement to the local bourse, said: “We would like to reiterate that Sapura Energy is still a going concern. We acknowledge that the group is currently facing short-term cash flow and liquidity issues, primarily exacerbated by the unprecedented Covid-19 pandemic. Sapura Energy has taken and will continue to take decisive actions to resolve the current liquidity issue, including expediting claims and commercial settlements with clients.”

As for a possible recapitalisation, in an interview with The Edge in late October this year, Sapura Energy CEO Datuk Mohd Anuar Taib had commented, “It is too early to say.”

PNB’s predicament

In an interview with The Edge late last month, PNB CEO Ahmad Zulqarnain Onn, was asked whether PNB — which has more than RM337 billion in assets under management — would participate in any future cash calls at Sapura Energy. He replied, “We will evaluate on a case-by-case basis. Datuk Anuar (Mohd Anuar Taib, Sapura Energy CEO) has gone on record to say they will be looking at asset sales to bring down the leverage, and that is something that we are in agreement with — the decision by the board on that — and they are working on many ways and means to raise cash themselves by looking through the contracting terms, etc.

“From our point of view, we are supportive, and we are letting the current (Sapura Energy) management work through these issues,” he added.

To recap, in September 2018, PNB took up unsubscribed rights shares in Sapura Energy’s cash call, nudging its shareholding up to 40% from 12.6%, and making it the largest shareholder in the company. PNB also subscribed in full to Sapura Energy’s Islamic redeemable convertible preference shares (RCPS i), which was also part of the RM4 billion cash call — RM3 billion from a five-for-three renounceable rights issue at 30 sen, and RM1 billion via a two-for-five renounceable rights issue of new RCPS i at 41 sen each.

Put another way, PNB forked out RM2.68 billion for the 40% stake and RCPS i in Sapura Energy.

One Sapura Energy insider says that the rights shares, priced at 30 sen, were pegged at a discount of 26.8% to Sapura Energy’s theoretical ex-rights price of 41 sen. It is also worth noting that at end-October 2018, Sapura Energy’s net assets per share was RM1.60.

“So, a logical question to ask is, why was such steep a discount given to PNB?” he asks.

According to him, the plan at Sapura Energy back then was not to merely raise RM4 billion from the cash call but to raise RM6 billion — with the additional RM2 billion for working capital.

“PNB was to play a key role in enabling this RM2 billion facility from banks, hence the discount,” he explains.

He says that the RM2 billion was to be disbursed in March this year when Sapura Energy restructured RM10.3 billion worth of debt, extending its loan period by a seven-year quantum and making its debt servicing more manageable.

“With the RM10 billion of debt restructured, what was needed was working capital, but one of the banks got nervous and pulled the plug, which in turn made the other banks jittery as well, so Sapura Energy did not get the RM2 billion,” he explains.

Sapura Energy did not reply to questions from The Edge about the additional RM2 billion working capital loan.

The banks involved in the restructuring of Sapura Energy’s RM10.3 billion debt are Maybank, CIMB, AmBank, RHB, United Overseas Bank, Exim Bank, ING Bank, Sumitomo Mitsui Banking Corp, Standard Chartered Bank and First Abu Dhabi Bank.

Maybank, which was roped in to undertake the merchant banking work for Sapura Energy’s cash call, is 49% owned by PNB.

One banker The Edge spoke to says the banks’ pessimism is understandable. “Oil prices are volatile, and if you look at Sapura (Energy), its debts are overwhelming,” he says.

As at end-July this year, Sapura Energy had cash and cash equivalents of RM695.74 million, while its short-term debt commitments, which have since been restructured, were pegged at RM10.88 billion with no non-current borrowings.

For its three months ended July, the company suffered a net loss of RM1.52 billion from RM747.11 million in revenue while its accumulated losses amounted to RM6.24 billion and it forked out RM118.73 million in finance costs.

The Sapura Energy insider says that with the requisite working capital requirements, it should be able to pull through.

“Oil prices are picking up, there has been little to no investment undertaken by oil companies in the last few years, so companies like Sapura Energy that have assets, are likely to benefit,” he says.

According to Opec’s Monthly Oil Market Report for November 2021, the world rig count as at end-October this year was 1,610, compared with 2,357 rigs in 2018, which could signal growing demand.

Brent Crude, which was testing the US$85 per barrel mark in mid-October, has since tapered off and is now at US$74 per barrel — which is still considered high.

While oil prices have been creeping up, Sapura Energy — which has capabilities in exploration, development, production, rejuvenation, as well as decommissioning and abandonment, among others — has not been able to capitalise on the increased demand.

The potential impact on Sapura Energy’s 700 vendors, many of which are bumiputera companies, could be one factor that may influence PNB, as one of its mandates is to improve the economic well-being of bumiputeras.

The Sapura Energy insider says aptly, “The ball seems to be in PNB’s court.” 

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