Sapura Energy expected to turn around in financial year 2020

TYPICALLY, most oil and gas (O&G) companies should be generating profits with the crude oil prices currently trading at a high of US$80 per barrel.

However, this is not the case with Sapura Energy Bhd, which suffered a net loss of RM126.06mil for the second quarter (Q2) ended July 31, 2018.

This also further widens Sapura Energy’s net loss to RM261.79mil for the first half of the financial year ending January 31, 2019 (FY19).

The net loss was in line with the lower revenue stemming from Sapura Energy’s engineering and construction, as well as drilling business segments.

Such a poor performance, however, does not come as a surprise, as analysts have previously cautioned of a lukewarm set of results due to prolonged losses in Sapura Energy’s drilling segment, which will take time to recover, even with improvement in its activities.

An analyst points out that that the Q2 net loss was larger-than-expected, as Sapura Energy traditionally posts a stronger set of financial results for the first half of the financial year.

While he expects a slight improvement for the group in the upcoming quarter, the monsoon season in the fourth quarter could likely hamper construction work, resulting in lower revenue recognition.

The analyst also expects Sapura Energy to make a turnaround in FY20.

“Most of the company’s contracts are still in the early stages.

“Hence, the group is unable to fully utilise its assets.

“Further losses are incurred as the cost of operating or maintaining the vessels do not correspond to revenue derived; there is also a time lapse between profit recognition from contracts,” explains the analyst.

The contract wins of RM5.3bil secured, to date, is positive to the group, eventhough it will not be able to mitigate Sapura Energy’s losses in the near term due to the long gestation of the contracts.

Taking cognisance of the improving oil prices and increase in oil and gas activities, the analyst opines that most O&G companies will continue to tread cautiously, in order to avoid the jarring experience of a plummet in oil prices.

“While there will be more jobs being rolled out, this will be in a cautious manner - in a way that will avoid charter rates from shooting up,” he notes.

In terms of revenue, Sapura Energy saw a decline to RM2.3bil in the first half of the year, compared with RM3.4bil in the corresponding period of FY18.

This was mainly due to lower activities and asset utilisation in the services segment.

In spite of that, revenue for the exploration and production segment has shown an improvement as a result of higher lifting as well as average realised oil and gas price achieved in the current period.

According to Sapura Energy, the recently awarded contracts are in the early stages of execution and its main vessels are in between projects as they are being mobilised for the new work.

“As these projects move from the engineering and procurement phase to fabrication and offshore construction, the group expects to see an increase in the utilisation of assets.

“This will in turn drive improvements in revenue and margins for the group.

“The group is actively venturing into a larger addressable market in key regions including the Middle East, Africa, Latin America, Caspian and Mediterranean as well as Southeast Asia and Australia,” it says.

The new contracts across its engineering and construction as well as drilling businesses have resulted in the group’s orderbook increasing to RM16.9bil.

In addition, Sapura Energy is embarking on a degearing exercise to pare down its net debt of about RM15bil, with a proposed disposal of a 50% stake in its oil and gas exploration and production (E&P) arm to Austria’s OMV Aktiengesellschaft (OMV AG).

Based on Sapura Upstream’s enterprise value of US$1.6bil (RM6.64bil), Sapura Energy could receive an estimated US$0.8bil (RM3.32bil) worth of proceeds from the deal.

The completion of a previously-announced proposed RM4bil rights issue would reduce Sapura Energy’s gearing ratio to about 0.9 times, while the 50% stake sale would shave the gearing ratio down to an estimated 0.7 times.

The rights issue has received support from three major shareholders to date, Permodalan Nasional Bhd (PNB), Kumpulan Wang Persaraan (KWAP) and Sapura Technology Sdn Bhd (Sapura Technology).

PNB and its associated funds will subscribe to their full entitlement rights shares with warrants, and excess shares with warrants not taken up.

Sapura Energy has a bid book of about US$7.4bil (RM30bil) worth of projects at present, with additional prospects of US$10.2bil (RM42bil) for this year.

The group expects to win large projects going forward, which will require the group to fork out funds for downpayments.