Sapura Energy turns the corner after tough times

  • Mar 25, 2019
  • Sapura Energy

KUALA LUMPUR, March 25 (Bernama) -- Amidst the edgy scenario of the global oil and gas industry in the last 12 months, Sapura Energy Bhd confounded its detractors to post a net-tax profit of RM208 million for the year ended Jan 31, 2019.

The oil and gas (O&G) company also surprised shareholders with a special dividend of 0.5 sen.

Although Sapura’s positive result was largely on the back of two major corporate exercises, which raised much-needed capital for the company to stay in the business and pare down its massive borrowings, the bright picture reflected one fundamental dictum -- Sapura Energy delivered on its promise to pull itself out of the rut and can focus on being profitable moving forward.

Now that it has shown that it is here to stay for the long haul, after having gone through tough times in the last five years, the question now is, how the company would start bringing in profits from its operations.

As global crude oil prices hold steady around US$65-US$67 a barrel for Brent crude, most analysts polled felt that the scenario should be reasonably promising as O&G companies continue to spend to meet energy demand.

The steady oil prices will help Sapura Energy’s engineering and construction (E&C), and drilling segments, as the company has a good job pipeline and large contract backlog of around RM17.2 billion, its highest in two years and 15 per cent higher from the previous year.

Significant profit contributions from contacts won in the last couple of years are expected to start coming in from FY20 onwards.

In the area of exploration and production (E&P), experts said it was one thing to find crude oil or gas deposits, but quite another thing entirely to bring the resources to market as an extraction system has to be put in place.

This is where Sapura Energy’s joint venture with Austria’s OMV AG will accelerate progress in the E&P sector, as the latter can bring in the necessary expertise to monetise various lucrative upstream contracts.

Research correspondent Tony Goh of Mergermarket, an Acuris company that provides financial data and research, said the joint-venture with OMV would likely benefit Sapura Energy as it now has a reputable partner which can share expenses in the expensive, and sometimes risky, exploration business.

“It can also open up opportunities for Sapura to access markets in regions where OMV has operations,” he said, adding, natural gas, in particular, would be a better prospect as the main driver for Sapura Energy’s earnings growth due to the larger reserves available for development.

Another analyst from a foreign research house who requested anonymity said although Sapura Energy can only get half the spoils from the upstream business, it was still better than not working the fields efficiently.

Analysts said Sapura Energy would be under pressure to perform as current oil prices are at level where O&G companies can operate profitably.

Moreover, its latest fund raising round certainly came with conditions, especially from largest shareholder, Permodalan Nasional Bhd, that the company should implement certain measures to ensure sustainability and a return to profitability.

On a brighter note, Goh said most of the painful provisions and asset write downs which resulted in heavy losses in previous financial years were completed.

“Sapura Energy’s latest funding round through its E&P unit stake divestment and rights issue are seen as necessary for the company to start its turnaround story.

The company had been mired in heavy debts of more than RM17 billion prior to the rights issue and upstream stake sale to pare it down to a gearing of 0.6 times from 1.7 times previously,” he said.

One analyst with a banking research house said the provision for impairment of RM1.5 billion, primarily for the company’s drilling and E&C assets, was important for it to be lean and mean for the future.

“The impairment provision should make Sapura Energy more competitive as it pits its expertise and experience against other O&G companies around the world,” he added.

Industry watchers said O&G companies like Sapura Energy were previously able to ride through with a high gearing ratio due to lucrative oil prices level, where almost all O&G companies could turn in a profit, no matter the debts and expenses.

But things changed with the sudden plunge in oil prices in 2014 and have been dragged down by heavy provisions and high debt financing ever since.

Going forward, analysts are of the view that Sapura Energy should leverage on its global footprint to gain more jobs with the likely pick-up in spending and O&G activities outside of Malaysia.

For example, China’s Sinopec Corp, the world’s biggest refining company, intends to spend US$20.3 billion (RM82.62 billion) in capital expenditure (capex) this year, its highest since 2014.

Hong Leong Investment Bank analyst Sean Lim recently echoed the same sentiment on brighter prospects following the increased capital expenditure by Petronas as there would be greater activity in the upstream sector.

On that same note, Goh said: “Unlike most Malaysian O&G companies which primarily operate in the domestic market, Sapura Energy’s engineering and drilling services can be utilised in many other markets.”

Therefore, he said the company should also be able to benefit from Petronas’ increased capex allocation of RM50 billion this year, as well as opportunities in other parts of the world, as it focuses on the Middle East, Africa, Asia Pacific, Europe and the Caspian and the Americas.

Similarly, Goh expects the utilisation rate for the company’s drilling vessels to reach more than 50 per cent this year from less than 40 per cent in 2018.

With a stronger balance sheet and more stable O&G industry scenario, shareholders are counting on Sapura Energy to deliver on its performance from now onwards.