This article first appeared in The Edge Malaysia Weekly on May 19, 2025 - May 25, 2025

COMPARED with the attention-grabbing RM1.1 billion “not a bailout” capital injection by the government in March, Sapura Energy Bhd’s (KL:SAPNRG) regularisation plan has drawn less scrutiny even though the government stands to emerge as its new single-largest shareholder with as much as a 35.92% stake without intent to make a takeover offer.

The loss of interest in Sapura Energy, once a high-flying home-grown oil and gas (O&G) giant, is a reflection of investors’ view of its prospects.

As its collapse is said to have had a domino effect on the country’s O&G ecosystem, it has been lucky to have twice received help.

Sapura Energy, formerly known as Sapura­­Kencana Petroleum Bhd, came about following the merger of Tan Sri Shahril Shamsuddin’s SapuraCrest Petroleum Bhd and Tan Sri Mokhzani Mahathir’s Kencana Petroleum Bhd in 2012. 

The group requires further restructuring even after a RM4 billion rights issue in 2019 and the US$1.7 billion divestment of an exploration and production (E&P) venture.

Instead of undertaking another cash call to tap shareholders for fresh capital, the company is getting help from the banks, in addition to the Minister of Finance Inc (MoF), which is “investing” RM1.1 billion in Sapura Energy in exchange for convertible loan stocks.

The restructuring plan will also see a capital reduction from RM12 billion to just over RM1 million, followed by a 20-to-one share consolidation exercise.

In the latest restructuring plan unveiled last Wednesday, Sapura Energy wants to convert bank borrowings of RM2.74 billion into equity and redeemable convertible unsecured Islamic debt securities (RCUIDS).

An amount of RM1.69 billion that it owes banks will be converted into RCUIDS at RM1.20 each, while another lump sum of RM1.05 billion in bank borrowings will be converted into Sapura Energy shares at 80 sen each (price after a proposed share consolidation and capital reduction). In addition, banks will take a haircut of RM750 million.

Meanwhile, Sapura Energy will pay off about RM1 billion that it owes vendors with the RM1.1 billion that MoF is injecting into the company.

For its RM1.1 billion injection, MoF will be issued redeemable convertible loan stocks (RCLS), which will be priced at 48 sen apiece, as opposed to Sapura Energy’s pro forma share price of 90 sen (after the 20-to-one share consolidation exercise based on the market price of 4.5 sen).

The RCLS carry a coupon of 2% to 4%, much lower than the 4.85% to 8.65% interest rate incurred by the company, according to its filing with Bursa Malaysia on May 14.

Apart from the debt-to-securities conversion, Sapura Energy is paying off RM2.25 billion in debt using proceeds from the sale of its E&P business.

All in, about RM7 billion in borrowings, including to some unsecured creditors, will be wiped off its balance sheet.

Its CEO Muhammad Zamri Jusoh told The Edge in an interview in March that he estimated Sapura Energy’s annual finance cost would drop to around RM250 million, from over RM800 million currently, by slashing the debts.

This is a crucial lifeline for the company, which has struggled to reduce its debts to below RM10 billion for six years now, and carries RM3.6 billion in shareholder deficit.

The shareholders of Sapura Energy appear to have to pay a steep price for the proposed restructuring exercise, which is expected to lift the company out of Practice Note 17 status.

Permodalan Nasional Bhd’s (PNB) stake through Amanah Saham Bumiputera will be diluted from 36.97% to 5.36% after the current restructuring proposal. PNB invested an estimated RM2.68 billion in the rights issue to recapitalise Sapura Energy in 2019.

Upon full conversion of the RCLS, MoF — which is seeking a mandatory general offer (MGO) waiver should the threshold be crossed — will replace PNB as the single largest shareholder with a stake of up to 35.92%. Sapura Energy describes MoF as a “strategic stakeholder”.

Meanwhile, at least three banks will emerge as substantial shareholders — Maybank Islamic Bhd (16.31%), CIMB Bank Bhd (7.37%) and RHB Islamic Bank Bhd (5.8%) — as a result of the debt-to-equity conversion and in the event they convert the RCUIDS. United Overseas Bank Ltd could also hold 4.07% in the company upon full conversion of securities into equity, the announcement shows.

BIMB Securities, one of two firms still covering the company, downgraded Sapura Energy to “hold” at four sen to take into account the full dilution impact. It added that it is “negatively surprised” with the 40% discount granted to MoF for the loan stocks.

MoF’s RCLS are secured against shares of certain entities within Sapura Energy’s engineering and construction (E&C) and operations and maintenance (O&M) segments. Beside this, earnings from its drilling business and its Brazil joint venture will be ring-fenced to pay off RM5.23 billion in debt.

In the financial year ended Jan 31, 2025 (FY2025), the drilling segment contributed RM1.15 billion in revenue, or 23.7% of the group total before eliminations, and posted a pre-tax loss of RM250.14 million.

The Brazil joint venture, part of the E&C segment, won a US$1.8 billion contract in 2024 and contributed about half of the group’s and its joint ventures’ RM14 billion order book as at end-March. The group’s entire E&C segment posted RM3.01 billion in revenue (62.2%) and RM464 million in pre-tax profit.

With the sale of its flagship E&P unit, the other segment that is not ring-fenced for debt payment is the O&M segment, which posted RM120.59 million in pre-tax profit in FY2025.

Even after Sapura Energy turned around in FY2025 with a net profit of RM189.5 million, some remain wary of more surprises.

Up until end-January, the group had impaired and amortised RM8.09 billion worth of goodwill. It still has about RM120 million of goodwill on its books.

Its debt securities comprising RM1.77 billion in RCUIDS and RM1.1 billion in RCLS come with a minimum annual coupon rate of 2%, or about RM57 million, a year. The RCUIDS can also be paid in kind in the form of new RCUIDS amounting to 2% a year.

There is little upside to Sapura Energy’s share price in the near term. Consensus net profit of about RM116 million for FY2026 translates into about 11.6 sen per share, based on one billion ordinary shares.

The consolidated price of 90 sen per share translates into a forward price-earnings ratio of 7.8 times, which is at the higher end of earnings multiples ascribed to other O&G players such as rig operator Velesto Energy Bhd (KL:VELESTO) (10.3 times), floating asset operator Bumi Armada Bhd (KL:ARMADA) (4.2 times), and support vessel player Lianson Fleet Group Bhd (KL:LFG), previously Icon Offshore Bhd, at 7.4 times.

Sapura Energy’s RM4 billion cash call in 2019 and the latest RM1.1 billion from MoF means it has raised RM5.1 billion in the last seven years.

Still, Velesto, Bumi Armada and Lianson are examples of successful O&G turnarounds through capital injections, disposal of non-core businesses and, in some cases, debt restructuring via waivers and conversion into equity.

Lianson (then Icon) raised RM250 million through a cash call as part of its restructuring, and its major shareholder Ekuiti Nasional Bhd sold a 50.2% stake for RM173 million. The state-owned private equity fund claimed to have recorded “cumulative gains of over RM500 million” throughout its more than 10-year holding period.

Velesto, which undertook a RM1.8 billion cash call in 2017, has been profitable and dividend-paying since 2023.

Bumi Armada, which secured a shareholders’ loan of US$75 million in 2019 (RM317 million then), has remained profitable since 2018.

Unlike Sapura Energy’s previous fundraising exercises, there is less pushback from shareholders this time — perhaps because the cash is coming from the government rather than being yet another billion-ringgit cash call to existing shareholders.

Will retail investors see the plan as light at the end of the tunnel and bite the bullet in the hope of seeing the conclusion to the company’s long-drawn restructuring journey? 

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