Sapura Energy outlook clouded by constraints

High gearing, working capital issues among drawbacks

“Its gearing remains high, and working capital constraints continue to impact execution, causing delays in rig startups.” UOB Kay Hian Research

PETALING JAYA: High gearing and working capital constraint continue to cloud the outlook of Sapura Energy Bhd although the group is making progress on its “reset plans.”

In the second quarter ended July 31, 2022 (2Q23), the oil and gas services provider narrowed its net loss by 99.8% to Rm2.59mil from a year ago despite a poorer performance from its upstream division, Sapuraomv Upstream.

This came on the back of continued progress on claiming back project costs and asset disposals, said UOB Kay Hian (UOBKH) Research.

“However, its gearing remains high, and working capital constraints continue to impact execution, (causing) delays in rig startups,” said a research firm in a report.

It noted that the group, which remains under PN17 status, had “positively sought assistance from the debt restructuring committee of the central bank, which expects Sapura Energy to submit a restructuring plan within the coming weeks.”

However, UOBKH Research rules out the likelihood of a rights issue to raise funds. On the other hand, the research firm sees Sapuraomv’s monetisation as still a high possibility.

This is based on the observation that the 2P (total proven and probable) reserves, and 2C resources (which is the quantity of petroleum estimated) are higher versus 2018’s 253 million barrels per day.

Additionally, the go-ahead of the onshore sour gas plant signed between PETRONAS, Shell and Thai-based PTTEP under Bintulu’s Petrochemical Industrial Park means a direct progress on monetising Sapuraomv’s B14 field, which is tied to PTTEP’S Lang Lebah field offshore Sarawak.

“Given PTTEP’S commitment and hints that it may set up an office base in Sarawak, we see a possibility of it becoming a potential buyer,” said UOBKH.

But also in order to not offend Austrian oil company OMV, whose entry cost was Us$1.6bil (Rm7.4bil) in 2018, UOBKH Research said it assumes “Sapura may consider exiting its stake at close to OMV’S valuation of US$6.3 (RM29.1) per barrel, potentially freeing up capital of up to Rm4bil on its 50% stake.

“While Sapuraomv’s associate earnings were disappointing in the first half of 2023 despite higher oil and gas prices, due to well write-offs and the unplanned maintenance of the Bintulu LNG terminal that impeded its gas production, we understand that the unplanned maintenance issue (for Module 5) was resolved in Aug 2022,” said the research firm, which maintains a “hold” call on the stock.

Meanwhile, Hong Leong Investment Bank (HLIB) Research thinks it will be an uphill task for Sapura Energy to turnaround its operations in the near-to-medium term due to heightened cost overruns in its projects.

The group could also face liquidity issues from difficulties in obtaining funding due to its stretched balance sheet as it is now a PN17 company; plus there are job delivery and execution risks as Sapura Energy has yet to display a satisfactory track record in recent years.

Considering its stretched and deteriorating balance sheet, and lack of investor interest, HLIB Research said it was ceasing coverage on the stock.

“As at end-july 2022, Sapura Energy’s order book stood at Rm7.7bil. We expect current hurdles and uncertainties to continue in FY23. The group’s net debt level continued to deteriorate, to Rm10.3bil as at end-2q23 from Rm9.9bil as at end-fy22,” it pointed out.

Net gearing stood at 54.3 times as at end2q23.