Cover Story: What went wrong at Sapura Energy

This article first appeared in The Edge Malaysia Weekly, on November 1, 2021 - November 07, 2021.
Cover Story: What went wrong at Sapura Energy
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SAPURA Energy Bhd is arguably the biggest Malaysian casualty of the meltdown in oil prices more than five years ago.

Despite oil prices having gained more than 60% year to date and Brent Crude breaching the US$85 per barrel band in late October, the company has not been faring well. In the last 10 quarters, it managed to muster only three quarters of profits, and for its second quarter ended July (2QFY2022), it suffered a net loss of RM1.52 billion from RM747.11 million in revenue. In the corresponding period a year ago, it chalked up net profits of RM23.74 million from RM1.22 billion in revenue.

In the notes accompanying its latest financials, Sapura Energy says, “The decrease is mainly contributed by provisions for foreseeable losses and higher project costs incurred for certain projects during the current quarter.” Its accumulated losses as at July 31, 2021, were an astounding RM6.24 billion. (See “Sapura Energy’s financial figures speak volumes about its woes” on Page 75).

In its heyday in early April 2014, Sapura Energy’s market capitalisation was RM28.5 billion. It was then the second largest integrated oil and gas (O&G) service provider in the world, after Italian giant Saipem SpA. At its close of 10 sen last Wednesday, the company had a market value of RM1.68 billion, meaning it has shed RM26.8 billion or more than 94% of its market cap in the last 7½ years.

What went wrong at Sapura Energy, and why is the company struggling even as oil prices are strengthening?

In an interview with The Edge, Datuk Anuar Taib, who was appointed Sapura Energy’s CEO in March — he joined the company as chief operating officer last October — explains its predicament.

“The question is not whether you can win bids, but also whether you can win the bid with enough risk mitigation so you can be comfortably delivering. Winning a series of bids is good for the headline, but what pays us is profit ... Based on what we see now, the difference between profitability and losses in our projects is the way we manage risks.

“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 says.

Anuar, a 30-year O&G veteran, honed his skills at Royal Dutch Shell’s subsidiary in Malaysia, Sarawak Shell Bhd. He was chairman of Shell’s companies in Malaysia before taking on the role of CEO of Petronas Carigali Sdn Bhd, the exploration arm of national oil company Petroliam Nasional Bhd (Petronas).

Anuar took over the helm of Sapura Energy from Tan Sri Shahril Shamsuddin, who had headed the company since July 2004 when it was still known as Crest Petroleum Bhd, a unit of Renong Bhd. Shahril had acquired Renong’s stake in Crest Petroleum.

Shahril and his brother Datuk Shahriman Shamsuddin have a 12.94% equity interest held via their private vehicle Brothers Capital Sdn Bhd.

“This company was built on the back of Tan Sri Shahril’s entrepreneurship. I’m very thankful for this trust, and also the trust of shareholders and the board to take on the job,” Anuar says.

He adds at another juncture of the interview, “Of course, I could also choose to blame everything on my predecessors, but what’s the point? I have 10,000 people who work for Sapura Energy’s best interests.”

Shareholders of Sapura Energy were unhappy over Shahril’s salary, which they perceived to be high. He took home RM71.92 million in FY2018 and RM84.24 million in FY2017 — which could be considered reasonable by global standards but is high from a Malaysian perspective. The company said his remuneration was determined by the board and his salary hinged on a share covenant he had with financial institutions, whereby he could not sell his shares and reduce his shareholding to below 10%, or step down as CEO.

To put things in perspective, Sapura Energy’s shares peaked at RM4.84 at end-December 2013, but Shahril did not sell.

The crux of the problem is government-linked investment company Permodalan Nasional Bhd (PNB), which through its funds holds about 40% of Sapura Energy. PNB’s shareholding came about after Sapura Energy raised RM4 billion in a cash call — RM3 billion from a five-for-three renounceable rights issue at 30 sen each, and RM1 billion from a two-for-five renounceable rights issue of new Islamic redeemable convertible preference shares at 41 sen each.

In total, PNB forked out RM2.68 billion in early 2019 and is sitting on huge paper losses. While the investment in Sapura Energy is small compared with its RM320.5 billion in assets as at last November, the attention on the O&G company’s financial issues has not been pleasant, and also raised questions as to how much exposure another PNB company — Malayan Banking Bhd — has to it.

In addition, speculation was rife that the relationship between PNB and Shahril was strained, brought about by former PNB CEO Abdul Jalil Abdul Rasheed’s departure in June last year, following discrepancies regarding his appointment. Jalil, 38, was also chairman of Sapura Energy.

In March this year, Shahril retired as CEO and was redesignated as a non-independent non-executive director. He relinquished the position at end-April. Shahriman remains a non-independent non-executive director of the company.

Shahril’s departure was followed by a slew of resignations from the board. At end-September, Reza Abdul Rahim, Sapura Energy’s 45-year-old chief financial officer, who has held the position since mid-2016, resigned. (See “Anuar dispels rumours surrounding departure of CFO” on next page.)

Reza’s resignation added fuel to speculation that all was not well at Sapura Energy. But what is the real issue at the company?

Global expansion problems

Sapura Energy’s global reach — it had a presence in Mexico, Brazil, Venezuela, Angola, Equatorial Guinea, Saudi Arabia, United Arab Emirates, Turkey, India, China, Australia, Japan, Vietnam and Russia, among others — was regarded as a mark of its success.

In mid-2014, when oil prices were trading at about US$110 a barrel, it had an overflowing order book of RM30 billion. In contrast, it is now RM7.5 billion.

However, oil prices had tumbled to below US$40 by end-2015. This in turn prompted Petronas to focus on its Refinery and Petrochemical Integrated Development (Rapid) project, part of the US$27 billion (RM89.3 billion then) Pengerang Integrated Complex in Johor, and hold back on O&G capex.

“Because of that [lack of investments locally in O&G], we had to go abroad. At the time, we didn’t have (international) credibility. We went to Mexico, India, with different clients we didn’t understand yet. They were not the Exxons, Shells of the world, they were more localised … But it’s okay, that’s part and parcel of learning,” Anuar says of the difficulties faced in foreign markets.

While grappling with issues in foreign markets and coming to terms with the operating environment, Sapura Energy made major acquisitions such as the tender rig business of Seadrill Ltd in April 2013 for US$2.9 billion. In February 2014, it bought Newfield Exploration Co’s Malaysian assets for US$895.9 million, which caused its borrowings to balloon.

In November 2018, it sold 50% of SEB Upstream Sdn Bhd (Newfield’s Malaysian assets) to OMV Exploration & Production GmbH for US$540 million. Sapura Energy insiders say the company reaped a lot of dividends from the acquisition of the assets in February 2014.

Divesting assets

In April this year, SapuraOMV Upstream (Malaysia) Inc — the strategic partnership between Sapura Energy and OMV Exploration & Production — disposed of its entire interests in several producing assets offshore Peninsular Malaysia to Jadestone Energy plc for US$9 million (RM36.95 million).

While there has been talk of Sapura Energy divesting drilling assets, this remains speculation.

“Today I have 14 rigs … Only seven in (locked-in) contracts. We might be able to get two more working. The question is, what do we do with the remaining? You really need to look at utilisation, the effectiveness of that utilisation ... Some vessels have not been operating for a while. If you keep [them], you still incur costs,” Anuar says.

As at end-July this year, Sapura Energy’s cash and cash equivalents were pegged at RM695.74 million, while its short-term debt commitments were a whopping RM10.88 billion. It had no non-current borrowings.

However, it had in March refinanced its borrowings with a consortium of Malaysian, regional and international banks for about RM10.3 billion, for a tenure of seven years, lengthening the maturity of its debt.

Nevertheless, Sapura Energy’s finance costs for the six months ended July were RM274.76 million, which indicates that finance costs — or interest on borrowings — are close to RM550 million a year.

“The RM10.3 billion of long-term debt is not sustainable,” Anuar admits.

Other than divesting assets, Sapura Energy is also looking at a change in strategy. It will be more selective in its bidding and place greater emphasis on turning in a profit.

What’s ahead

On the outlook for Sapura Energy, Anuar says candidly, “This year and next year will be tough, the (O&G) industry as a whole is facing a challenge, but we need to go back (to the basics). People might call it a boring company, but I want to create a solid, sustainable company for the long term. That’s the objective.”

The company is expected to divest its assets, a move which Anuar has mentioned in the past.

As at end-July this year, Sapura Energy’s net asset per share was 48 sen, which is almost five times its share price. Its choice assets include the 14 drilling rigs, three fabrication yards, about 15 pipe-laying vessels and barges, and 15 other ships, which include survey and accommodation vessels, anchor handling tugboats and diving support vessels.

On its prospects, Sapura Energy says in the notes accompanying its financials, “Despite the strengthening of oil price, the operating conditions that confront the industry and the group remain challenging, partly due to continued cautiousness in capex spending by the oil and gas clients and uncertainties caused by the Covid-19 pandemic. The impact of the pandemic to operations, coupled with project execution delays primarily for engineering and construction (E&C) projects in Taiwan and India, has exacerbated, resulting in the group’s disappointing performance in the current quarter.”

According to Anuar, Sapura Energy has accumulated RM460 million in Covid-19-related costs, which are being claimed from clients.

“As a whole, the cost of Covid-19 was RM460 million, but the impact on contract costs to us was two to four times higher … So imagine, those are the costs that I incur and that have not been paid. So what does it do to the P&L? That’s negative cash flow going out, nothing in,” he says.

While his explanation on what went wrong at Sapura Energy holds water, many of his industry peers say it won’t be easy getting out of the predicament. Will he succeed in doing so?

Anuar dispels rumours surrounding departure of CFO

In late September, Sapura Energy Bhd was in the news when chief financial officer (CFO) Reza Abdul Rahim stepped down. CFO for five years, he had joined the company in 2012 as a senior vice-president in one of the group’s units.

And Reza was not retiring — he is only 45 — but left to “pursue other opportunities”, according to Sapura Energy’s announcement to Bursa Malaysia.

Then a few days later, the oil and gas company announced a shocking set of financial results. For its second quarter ended July (2QFY2022), it suffered a net loss of RM1.52 billion from RM747.11 million in revenue.

Reza resigned in September

And this hefty loss came about when oil prices are rebounding, having gained more than 60% year to date and Brent crude passing the US$85 per barrel mark last week.

This sparked market discussions, including talk that Reza’s departure was linked to the group’s financial performance. Others say it was simply the new CEO Datuk Mohd Anuar Taib “bringing in his own crew”.

When asked whether Reza’s leaving had anything to do with the bleeding of Sapura Energy, Anuar was quick to dispel the rumours.

“Sometimes, it’s one of those [situations where] there’s no story behind it ... [So] let’s not create a story. I think it’s just that Reza has served this organisation very well, for many years. And he was part of this founding group of Sapura … and he thinks he wants to go and find other opportunities.

“So, we respect that, and I wish him all the best. Here’s the thing ... Of course, people would like to sensationalise the whole thing. Change CEO, soon the CFO, CEO brings his own gang, all of those things. But it is not. He (Reza) is taking a break and wants a different challenge,” he explains.

Reza was replaced by Chew Seng Heng, who has impressive credentials and is from Royal Dutch Shell, where Anuar had been prior to taking the top job at Petronas Carigali Sdn Bhd.

Then again, there have been a number of changes, not just at the management level, but at the board level as well. One former analyst refers to the Sapura Energy board as “being full of superstars”.

While founder Tan Sri Shahril Shamsuddin left in April, some of those who left at about the same time include Syed Ali Syed Salem Alsagoff, while others such as Datuk Roslina Zainal left in October last year and Tan Sri Tommy Bugo @ Hamid Bugo left in July 2020.

Other than Anuar, who doubles up as an executive director, other board members include Tan Sri Shamsul Azhar Abbas, who was president and CEO of national oil company Petroliam Nasional Bhd (Petronas); Tan Sri Megat Zaharuddin Megat Mohd Nor, who was with Royal Dutch Shell and Malayan Banking Bhd as chairman; Bernard Rene Francois Di Tullio, who was with Technip for 39 years; Datuk Iain John Lo, who was country chairman of Shell Malaysia Ltd; lawyer Datuk Azmi Mohd Ali, who was previously Petronas’ legal counsel; and Lim Tiang Siew, who was group chief internal auditor of CIMB Group.

While it is still early days, expectations are high that the star-studded board will be able to raise the bar on corporate governance and ensure better checks and balances to safeguard the interest of the company and its shareholders.

 

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