SEPTEMBER 23 — Sapura Energy Berhad (SEB) was recently in the news when the Corporate Debt Restructuring Committee of Malaysia (CDRC), which is a committee under the purview of Bank Negara, accepted its application for assistance to mediate the debt restructuring negotiations with its Multicurrency Financiers. To re-cap, based on SEB’s latest available quarterly reports, the company has some RM10.7bil borrowings and just some RM0.5bil in cash, deposits, and bank balances as at end of the Q1 period in April 2022. The company's balance sheet is severely strained with total equity of just RM159mil as it has more than RM13bil in accumulated losses sitting in its books.
SEB’s finances are not only tight but they are unsustainable as operating cash flow, based on its Q1 report card for the financial year ended 31 January 2023, was not even able to cover 60 per cent of its finance cost, while profit for the quarter itself was boosted by forex gains.
SEB’s woes not its own doing
SEB, which was once known as SapuraKencana Petroleum Berhad (SKPB), was a highflyer when two Malaysian-born oil and gas players came together to create Malaysia’s largest integrated oil and gas (O&G) player and ranked fifth globally by asset value covering 90 per cent of the oilfield services value chain, including drilling, engineering, procurement and construction, transportation and installation, and marine services. At the time of the merger in May 2012, SKPB had a market capitalisation of more than RM11.8bil, and the company even made it to the 30-stock FTSE Bursa Malaysia KLCI (KLCI) in the June 2013 review. Post-KLCI inclusion, SEB soared to a high of RM4.94 and peaked with total market capitalisation at about RM28.5bil. SEB was kicked out of the KLCI three-and-half years later and replaced by IJM Corporation.
The merger of SEB required approval of the shareholders of the merging companies so as a sweetener to the original shareholders, all shareholders of both SapuraCrest Petroleum (SCP) and Kencana Petroleum (KP) received shares of the merged entity and a total cash payment of RM1.84bil through a capital reduction exercise. Based on the shareholding of the two companies pre-merger, among the beneficiaries of the cash payout were institutional shareholders of SCP, which among others were Seadrill Limited with about 23.6 per cent stake in the company and the Employees Provident Fund (EPF) with 9.1 per cent total shareholding. The EPF was also a major shareholder at KP with approximately 12.1 per cent, while other institutional funds too were shareholders of either or both of the companies and this included Kumpulan Wang Persaraan (KWAP), Lembaga Tabung Haji, and Permodalan Nasional Berhad (PNB) based on latest annual reports of the companies before the merger.
Funding to acquire and compete globally
It was with the merged entity that SEB would be able to have the capital base to acquire capability and compete globally. Subsequent to the merger and acquisitions, a revision to the loan structure required some form of personal guarantee from its then CEO and largest remaining individual shareholder Tan Sri Shahril Shamsudin (TSSS). There was a condition attached to the facility and one of them was for TSSS to maintain at least 10 per cent shareholding in the company at all times.
The SEB board agreed to ensure the deal got through and the rest as they say was history.
Being one of the largest integrated O&G companies, SEB did not rest on its laurels but diversified away from being over-reliant on Petronas for contracts. SEB grew with more than 11,000 workforce and with a presence in over 20 countries. After all, at that time, it had the balance sheet strength of more than RM6.3bil in shareholders’ funds and total assets of more than RM15bil when it close its first financial year end in January 2013. With global oil prices soaring past US$100 (RM457) per barrel, SKPB saw an opportunity to extend its market reach by acquiring Seadrill Ltd’s tender rig business in a deal valued at US$2.83bil (or RM8.75bil based on a USD/MYR exchange rate of RM3.0918 then), which was funded partially via issuance of 587mil new SEB and bank borrowings. The Seadrill deal was done in April 2013 while six months later SEB also acquired Newfield Exploration for almost US$900mil or RM3bil. The two major acquisitions effectively meant SKPB bought some US$3.73bil in assets worth some RM11.75bil, of which some 90 per cent of it was funded via borrowings, based on the exchange rate then.
Oil prices key to valuation
As they say, in hindsight, we all have a perfect vision, or rather a 20/20 vision. However, in reality, whether it is the corporates, individuals, or even the government, decisions are made based on available information at the time of decision making. Of course, it is also driven by expectations and forecasts as to what a particular decision brings to the table. For SEB, the decision to acquire both Seadrill and Newfield was not only the right decision at the time of purchase driven by rising crude oil prices but a strategic one as it allowed a Malaysian-born O&G to go global and at the same time enable the company to diversify away from being over-reliant on not only Petronas but Malaysian related contracts. This can’t be denied as even the investment fraternity welcome SEB’s acquisitions, which saw SEB’s share price hit record highs as analysts maintained their buy calls with even higher target prices.
However, as oil prices collapse and fell to less than US$30 or RM137.10 per barrel by early 2016 from a high of more than US$100 (RM457), SEB's fortunes turned for the worse. It got hit by impairment charges related to the acquisition of both Seadrill and Newfield as well as other assets. Worse, as the Ringgit weakened, the inverse was true for SEB’s dollar liabilities as its debt mounted due to huge borrowings taken to finance the acquisition of the two prized assets. Without a doubt, SEB was hit hard by both the collapse in oil prices as well as the weakening Ringgit. Over the years, the impairment of its drilling assets alone has wiped out close to RM10bil in asset value while Engineering & Construction, as well as Exploration and Production (EC/EP), has reduced the size of its balance sheet by almost RM4bil. After the oil market crash, just as the industry was recovering, the pandemic caused significant damage not only to SEB but to most other global O&G companies too. Seadrill itself went into Chapter 11 while McDermott followed suit in 2020 as well. Others went through fresh cash calls, restructuring, privatization as well as spin-offs. In essence, when in trouble, companies do take steps to rehabilitate, with fresh capital as well as restructuring. The option for SEB is no different.
SEB is a value enhancer and creator
While the chips are down on SEB, one cannot deny the fact that SEB has created tremendous value within the O&G ecosystem as it has the only global O&G market player that offers a full spectrum of services among the top O&G companies, globally. SEB is a home-grown Malaysian O&G with more than 80per cent Malaysian employees of which some 600 are based overseas. While SEB’s latest turnover may not reflect its full potential, it has contributed more than RM90bil to the national economy over the last five years and remains one of the key umbrellas for the vendor ecosystem, of which 65 per cent are local, with RM6.8bil worth of contracts awarded. SEB has also generated foreign income via dividends worth more than US$2bil (RM9.14bil) over the last three years. In hindsight, under TSSS, SEB has grown by leaps and bounds and was an icon bringing Malaysia’s O&G capabilities to the global arena with the right acquisition strategy. However, factors beyond the control of the company resulted in severe damage to SEB’s balance sheet and fortunes due to the collapse of oil prices. The weaker Ringgit to a certain extent too caused the company to be heavily indebted while the debt-funded strategy for the overseas assets acquired was poorly crafted.
There is a positive side to what SEB brings to Malaysia and Malaysians as it has not only a high workforce, paid wages over RM1.4bil a year, but as well as the vendor ecosystem comprising some 3,000 of them, to which SEB owes a substantial sum too. As for PNB, SEB is a strategic national asset and as a major shareholder, it ought to play a more decisive role in spearheading the company’s direction, both financially as well as strategically.
Setting the stage for recovery
In any rescue effort of a corporation, the important thing is to look at the company’s operational capability and not just the finances. As for the O&G global outlook is concern, it is a blue sky all over again as it was just about a few weeks ago when oil prices were still trading well above the US$100 (RM457) per barrel mark. Hence, the global outlook is positive and SEB has the capability and capacity to take on new jobs and contracts, but only if it can fix its balance sheet and working capital needs. For one, while debts have been brought down to just about RM10bil from RM18bil via the RM4bil rights issue exercise as well as the sale of assets, very little of the cash raised was available for working capital needs. While SEB has maintained its obligations to financial institutions, the company found itself cash-strapped as it was unable to sustain itself to pay vendors, which led to project delays, losses, and a longer cash conversion cycle.
While the CDRC can help the company to address the current debt level as well as restructure the company’s obligations, SEB itself needs a cash infusion to turn the tables around, address its working capital needs and continue to build on its positive global presence. The payback may be long term and mistakes have been made but its contribution to the national objective to build more multinational, Malaysian-born companies should not be underestimated.
*Pankaj Kumar is the Managing Director of Datametrics Research and Information Sdn Bhd (DARE), a Malaysian- based data gathering, strategic analysis and advocacy platform for businesses and industries in key sectors of the Malaysian economy.
** This is the personal opinion of the writer and does not necessarily represent the views of Malay Mail.