Sapura Energy still damp despite RM905m new jobs
Khairul Khalid 
The company is exploring the option of floating its exploration and production unit – Bloomberg

Sapura Energy Bhd’s latest contract wins worth RM905 mil should have brought much needed cheer to shareholders, but instead turned out to be a damp squib judging from its sluggish share price.

It looks like investors still need some convincing as sentiments on the company are further weighed down by concerns over the impact of Sapura Energy’s client, Petroleo Brasileiro SA’s (Petrobras) legal suit in the US. In addition, depleting cash pile and high gearing are still a drag on the company.

A local analyst says although Sapura Energy has bagged projects worth about RM2.4 bil the past three months, the volatile markets have somewhat affected its share price. 

“The new contracts, and the previous ones they won last November, show Sapura Energy is still a major player industry capable of winning big jobs, but they have not had significant impact on share price.

“It is partly due to market sentiments that are still poor despite the crude oil price rally this year. The current turmoil in the world stock markets does not help either,” explains the analyst.

Although the company’s share price spiked briefly this year along with the price rally, it has plunged 62% year-on-year (yoy), down from RM1.84 on Feb 9 last year to 70 sen on Feb 8 this year.

This year, the counter touched a high of 97.5 sen on Jan 8, but has not come close to that level since. It hit a 52-week low of 66.5 sen on Jan 2.

Last November, Sapura Energy bagged new jobs worth RM1.47 bil, which include providing services to Petronas Carigali Sdn Bhd, Repsol Oil & Gas Malaysia Ltd, the Refinery and Petrochemical Integrated Development (Rapid) project and in Brazil.


RM14.4b order book

Its five recent job wins include two from Petronas

On Feb 5, the company announced five new contract wins worth RM905 mil for its financial year 2019 (FY19), with four of them from the domestic market and one from India. With the new projects, its current order book stands at RM14.4 bil.

Following the announcement of the job wins, the counter rose 2.83% to close at 72 sen on active volume of 154.41 million shares on Feb 6, from 70.5 sen with 66.19 million shares traded on Feb 5. However, it lost some ground to close at 70 sen on Feb 8.

Of the five recent contracts won, two are for Petronas Carigali. One is for the provision of engineering, procurement, construction and commissioning (EPCC) of Kinarut ERB West Compressor upgrading project for three years, expiring in the fourth quarter of 2020. The other is for the provision of minor EPCC for the Bokor Betty brownfield and rejuvenation for four-and-a-half years, expiring in the second quarter of 2022.

The third is an EPCC plus installation for full field development (FFD) phase 2 facilities in the North Malay Basin by Hess Exploration and Production Malaysia BV, which is expected to complete by the second quarter of 2020.

The fourth is for the provision of transportation and installation works for the Bokor central processing platform project awarded by Malaysia Marine and Heavy Engineering Holdings Bhd, expected to complete by March 2020.

The fifth is for the provision of offshore/onshore pipeline and terminal works for Mumbai Port Trust’s fifth oil berth project, expected to finish by May 2019.


Opportunities for investors

An MIDF research report states that despite the uncertainties surrounding the oil & gas (O&G) sector as well as Sapura Energy’s weak earnings, there are opportunities for investors.

“Although we acknowledge that Sapura Energy’s profitability might still be weak due to its other underperforming segments, we believe the share offers short-term trading opportunities for investors,” it says, maintaining its trading buy call on the company with a target price of RM1.01.

The research house says the rally of global crude oil prices in the last six months which have spiked over 40%, causing a slight revaluation in local O&G related shares.

“The rise in global crude oil prices has also stoked investors’ interests in local O&G shares, where trading volume for Sapura Energy surged for the past two months (average of 110 million shares). We are of the opinion the current broad-market sell-off presents trading opportunities for investors seeking exposure in O&G service providers with direct upstream exposure,” it adds.

The oil price rally has also led to news that the company is exploring a possible listing of its exploration and production (E&P) division (previously called the energy segment), but it is still too early to gauge its potential impact. The company’s other major units are engineering and construction, and drilling.

MIDF is positive over this possible development because it would allow the E&P unit to gain higher valuation as a separate listed entity. It points out that valuations of local and global independent upstream O&G producers have increased by over 10% since December when the oil price rally began.

The research house says Sapura Energy’s E&P unit is the only stable segment in terms of earnings. For the first nine months of financial year 2018 (9MFY18), the segment’s revenue inched up 5.7% yoy while cumulative pre-tax profit sustained at above RM50 mil.

Other than potentially higher valuation from a listing of the E&P unit, MIDF also cites other possible benefits such as more efficient capital raising and allocation for future heavy oilfield capital and operating expenditures, as well as a possible reduction in existing group debts from proceeds of a spinoff. Its current net gearing level stands at 1.26 times.

For the third quarter ended Oct 31, Sapura Energy plunged into the red with a net loss of RM274.41 mil from a net profit of RM158.06 mil a year ago, on the back of lower revenue of RM1.28 bil versus RM2.22 bil.


Under-utilisation issues

On the other hand, Public Investment Bank throws a note of caution on the possible listing, saying it might not be enough to steer Sapura Energy out of trouble.

“Despite the fact that advisers have been engaged to evaluate and advise on the potential listing of the E&P business, we are mixed on this. While a potentially lucrative one-off gain (and/or cash injection) from any exercise is attractive, a stake dilution may do little to mask a drilling division marred by under-utilisation and an engineering division constantly in need of new contracts to support valuation of the group as a whole.

“That said, these are still at very preliminary stages with nothing decided, and we continue to believe management will act in the best and long-term interests of all shareholders,” it adds.

There are also other pressing issues that could impact Sapura Energy’s future direction.

Its cash level fell RM1.6 bil, from RM3.52 bil on Jan 31 last year to RM1.89 bil in November, due to heavy capital expenditure and debt-servicing obligations. This pushed its net gearing ratio to 1.26 times, exceeding its medium-term target of 1.1 times.

Although the company has reiterated its ability to fund future capital expenditure requirements and debt obligations, some analysts have still cited this as a concern.

Gearing ratio reflects the amount of existing equity required to pay off all outstanding debts. Generally, a lower ratio means greater financial stability for a company.


Brazilian clouds clearing

Recent developments in Brazil may provide some relief with the clouds hanging over Sapura Energy’s business there clearing slightly.

Last month, Brazil’s government-controlled oil company Petroleo Brasileiro SA (Petrobras) agreed on a US$2.95 bil settlement over a US class action corruption lawsuit, one of the biggest settlements by a foreign company in the US. This month, Petrobras announced that it is selling its refinery in Pasadena, Texas as a consequence of the legal suit.

Sapura Energy is not implicated in the suit but there were concerns that Petrobras’ legal wrangling in the US could have a domino effect on its contractors and vendors.

Sapura Energy has huge pipe-laying support vessel (PLSV) contracts from Petrobas and its business in Brazil is one of its best performers. All of Sapura Energy’s six PLSVs in Brazil remain in full operation, operating at an average utilisation of more than 97% and reporting the most robust numbers amongst all its business segments.

The settlement by Petrobras was smaller than what many analysts anticipated, with JP Morgan saying it ends the “extremely high uncertainty” about the company’s potential liability. Some analysts had expected a much higher settlement of US$5 bil to US$10 bil, which could have had major financial implications on Petrobras.

The legal action was the result of what was dubbed the “Car Wash” investigations in Brazil. The scandal which began in 2014 involved kickbacks from contractors to executives of state-run companies and politicians for access to public projects.

This article first appeared in Focus Malaysia Issue 271.