Sapura Energy stabilises the ship
The largest Malaysian O&G services provider seems to have adjusted to the low oil price regime
Salient points
> Sapura Energy has salient orderbook
of RM17bil.
> Hurricane season in the US moved oil
prices up to more than 3-month high. > Management indicates that it has stabilised the company to adjust to the lower oil rice regime. AFTER recently posting a core net loss of RM15.4mil, which was below consensus estimates in its most recent quarter’s results, Sapura Energy Bhd seems to have attracted the attention of some investors following an initial share price retracement.
From the time its results were announced on June 19, the counter had declined some 25% to its recent low of RM1.38 due to the lower than expected results.
It had, however, regained some lost ground and traded about 10% higher from the low of RM1.38 to RM1.54 at press time.
The largest oil and gas (O&G) services provider in the country seems to have adjusted to the current low oil price environment and today sports a leaner balance sheet.
In its latest financial results for its first quarter ended Apr 30, Sapura Energy had seen its net debt to equity ratio sitting at 1.16 times as of Apr 30 against 1.25 times a year ago.
The company still has a sizeable orderbook in hand and replenishment as well and this could be driving some returning interest in the counter.
RHB Research Institute in its recent report highlighted that the company has some RM17bil of outstanding orderbook in hand in the engineering and construction and the drilling business segments.
The research house maintained its “buy” call with a lower target price of RM2.20 on Sapura Energy and notes that it expects the company to register better performance in the quarters ahead.
Sapura Energy says in its recent financial results that it remains committed to its key strategies of replenishing the order book while it will continue to rebase costs and improve operational efficiency.
It recently completed refinancing exercise, which is part of its capital management plans and notes that this will further strengthen its fundamentals.
Other factors at play that could be driving some buying interest include oil prices which seemed to have stabilised at the US$50 handle and have seen some modest gains from that level.
Hurricane Harvey which had slammed the biggest oil state in the US in Texas some two weeks ago had also added to some gains in oil prices.
Adding to this is another natural disaster Hurricane Irma that is slated to reach Florida this weekend or the Monday.
Wire reports indicate that the damage from Hurricane Harvey had hit US’ crude production harder than expected and Irma which is now headed for Florida could cause more disruptions to the petroleum industry.
Hurricane Harvey’s impact had impacted US oil output which fell by almost 8%, from 9.5 million barrels per day (bpd) to 8.8 million bpd, according to statistics by the Energy Information Administration.
Reuters also reported that port and refinery closures along the Gulf coast and harsh sea conditions in the Caribbean have also impacted shipping of the commodity.
Brent Crude Oil prices last traded at US$54.60 per barrel sitting at a more than three month high and having gained almost 21% from its recent low on June 21 of
We are still positive on Sapura Energy as we believe its engineering and construction segment would be able to add to its orderbook, supported by the upcoming commencement of gas production. RHB Research
US$45.19. An energy analyst says that he still takes a cautious view to the energy sector given the numerous “fake breakouts” in oil prices that had been seen over the past year or so.
“I think it is time to hold back now first and I am just observing the price trend before upgrading any of my ratings to any of the stocks under my coverage,” he says.
Some observers expect oil prices to normalise to its mean soon after the effects of the twin hurricanes Harvey and Irma are fully played out in the markets.
For Sapura Energy, the business model is simple - it should benefit should sentiments in oil prices recover further.
But just like many other players in the oil and gas industry, Sapura Energy does not dare predict with certainty the future direction of oil prices.
The company says that oil prices are still in uncertain territory and that it believes the challenging environment will persist in the short and medium term.
“We are confident that our strategic and operational plans that have been put in place will enable us to navigate through this period,” the company says in its notes to the financial results.
The company had been impacted by weaker performances at the drilling and the engineering and construction segments including the higher effective tax rate during the quarter.
RHB Research says it expects the company’s effective tax rate to normalise in the coming quarters and earnings should also normalise after the seasonally weak first quarter.
“We downgrade our earnings estimates by 5% for the financial year 2018 (FY18 ending Jan 31) and FY19 due to the surprise redeployment of T-10.
“We are still positive on Sapura Energy as we believe its engineering & construction segment would be able to add to its orderbook, supported by the upcoming commencement of gas production,” the research house says.
In the year-to-date period of its FY, the company has won US$303mil worth of contracts in its engineering and construction segment. “We estimate its current engineering & construction orderbook to be at US$1.4bil, excluding Brazil’s operations.
“We understand that its Brazil operations are at 99% technical utilisation, contributing 88% of associate earnings in the first quarter as all six of its vessels are operational,” RHB Research says.
Given the unpredictable nature of storms and in turn oil prices, it is difficult to tell if it is time to buy the stock or not.
However, recent indications by the management that the company has managed to stabilise the ship amidst the uncertainties is a good cue for investors to take note of and consider its long-term prospects in the oil and gas sector.