This article first appeared in Forum, The Edge Malaysia Weekly on March 17, 2025 - March 23, 2025

In the world of high finance, there are sophisticated investors who cannot accept failure. Instead, they tend to invest more money, in a strategy known as “averaging down”. It effectively means putting more money into the investment with the view of keeping it afloat, and waiting in the hope that the investment will recover and they will reap the benefits.

In reality, averaging down is a dangerous game to play, especially if the underlying asset has weak fundamentals. It is akin to throwing good money after bad.

Sapura Energy Bhd (KL:SAPNRG) is an example of how putting more money into a company with weak fundamentals will not solve its problems. While the company’s financials are improving largely because creditors have given the nod for a debt restructuring plan and because of a RM1.1 billion injection from the government, they are not strong enough for it to bid for contracts.

The chances of the old Sapura Energy, which was a champion in the domestic oil and gas (O&G) industry thanks to Petronas’ policies which favour bumiputera-owned companies, returning to form are remote. Banks and vendors will think many times before doing business with it for fear of not being paid.

The government’s rationale for injecting the RM1.1 billion in the form of convertible debt instruments that pay a coupon of just 2% is to rescue the vendors, which are bumiputera-majority companies. Over time, another bumiputera O&G leader may emerge and the vendors are likely to face the same problems.

Companies in the local O&G industry are mollycoddled. Most contracts are given to companies that are majority owned by bumiputeras and that have invested in assets.

In the early years, Sapura Energy grew in a shielded environment, with Petronas providing the umbrella. Except for a handful of companies, all the players in the industry grew also because Petronas provided support in terms of contracts under a restricted bidding process.

Petronas always insists that the vendors have to deliver or they will be blacklisted. But it is questionable whether the current process of ensuring that the vendor system works is effective.

If Petronas has been strict in ensuring that the vendors always deliver, invest prudently in assets, keep their books healthy and mitigate their risk in securing contracts, why do we have a fiasco such as Sapura Energy’s?

Why does the government need to inject RM1.1 billion in redeemable convertible debt to ensure the company’s vendors are paid and the O&G ecosystem does not fail?

Sapura Energy has been struggling to find its footing since the June 2014 oil crisis. In the last 10 years, it only made profits in 2015, 2017 and 2019.

For the financial year ended Jan 31, 2015, it posted a profit of RM1.4 billion on a turnover of almost RM10 billion. Since then, it has been downhill for the company. It made paltry profits of just above RM200 million in 2017 and 2019. It recorded huge losses, especially after 2020 when Permodalan Nasional Bhd (PNB) began to take an active role in the company.

It was after PNB’s entry that the true picture at Sapura Energy — an underperforming multibillion ringgit fleet of assets and an order book in excess of RM19 billion that did not produce profits — began to emerge.

PNB came in after a RM4 billion rights issue in September 2018, for which it forked out RM2.67 billion. At that time, it was deemed as a rescue of Sapura Energy because the company’s largest creditor was Malayan Banking Bhd (KL:MAYBANK), the jewel in PNB’s portfolio.

Between 2020 and 2024, Sapura Energy incurred massive losses of RM17.6 billion. It bled largely due to impairments of assets and anticipated losses from contracts it had won before PNB came into the picture.

Until 2020, Sapura Energy was managed and controlled by Tan Sri Shahril Shamsuddin, its founder, president and CEO. Shahril retired in March 2021 and his position was filled by Datuk Anuar Taib, a nominee of PNB and a seasoned hand in the industry.

During his tenure, Shahril engineered a merger with Kencana Petroleum Bhd, which paved the way for the enlarged Sapura Energy to have a bigger balance sheet, enabling it to acquire assets in its bid to become a global O&G leader.

The merger, completed in mid-2012, brought together Shahril and Tan Sri Mokhzani Mahathir, two influential personalities in the bumiputera corporate world. Shahril’s father was Tan Sri Shamsuddin Abdul Kadir, a trusted ally of Tun Dr Mahathir Mohamad, who is Mokhzani’s father.

Although it was supposed to be a merger of equals, Shahril ran the show. Mokhzani started to dispose of his stake in 2014 and ceased to be a substantial shareholder in 2017.

In 2013, Sapura Energy acquired assets from Seadril Ltd for US$2.9 billion (RM8.8 billion then). The next year, it bought Newfields International Holdings Inc’s Malaysian O&G fields for US$895 million. The Seadrill acquisition made Sapura Energy the largest tender rig owner in the world.

At its peak in 2014, Sapura Energy was the world’s second largest integrated O&G service provider after Saipem SpA. In January 2019, it had an order book of RM19.4 billion.

But the large order book and fleet of assets did not reflect the company’s bottom line. The projects did not deliver the desired results.

In an interview with The Edge in November 2021, Anuar, who took the helm from Shahril in March 2021, said that while winning contracts was good for the headlines, what mattered most was whether the jobs that Sapura Energy had won made money for it.

“We need to start looking at not only winning [bids], but also whether a contract is onerous, are the terms too 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,” he said.

Today, Sapura Energy cannot bid for jobs as it has lost the confidence of the banking system. No vendor would want to do any job for it without assurance that it will be paid. The only jobs it can bid for are those that involve daily charter rates, from oil majors such as Petronas.

With assured payment from Petronas, Sapura Energy can probably obtain some kind of facility from the banks. And this time around, banks and vendors will be careful to ensure that the money goes into an escrow account from which they will get paid before Sapura Energy earns its profits.

The significant difference between now and 10 years ago is that Petronas is no longer what it used to be; it has to share its bounty with Sarawak’s Petroleum Sarawak Bhd (Petros).

Even Petronas has been cutting its workforce. Its vendors have been told they will no longer get generous terms in their contracts. The entire O&G environment will be forced to become more competitive, and many will fall by the wayside.

The RM1.1 billion injection is just a drop in the ocean for the local O&G ecosystem compared to the billions that Petronas spends annually, dishing out contracts to keep its vendors afloat. It would not make much difference to the vast majority of them except to underline the fact that the government has stepped in to help Sapura Energy resolve its problems with the vendors.

M Shanmugam (m.shanmugam@bizedge.com) is a contributing editor at The Edge

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