Background Shareholdings of Sapura Energy Bhd

Sapura Group of Companies started as a small company with 6 staff founded by Tan Sri Abdul Kadir Shamsuddin in 1975. The name Sapura was taken in conjunction with the name of his wife, Siti Sapura. Initially, the company was involved in the telecommunication sector by buying Uniphone Works from United Motor Works (now UMW Holdings). In the 1980s, Sapura bought Malayan Cable Bhd to consolidate its dominance in the telecommunications industry. Next, Sapura Group of Companies led by Tan Sri Dato Shahril Shamsuddin (previously was the CEO of Sapura Energy) diversifies its business into other industries and services. The birth of Sapura Energy Bhd (SE) was the result of a merger between Tan Sri Mokhzani Tun Mahathir's Kencana Petroleum Bhd and SapuraCrest Petroleum Bhd which formed SapuraKencana Petroleum Bhd (SapKen) in 2012 and was listed on the Main Board of Bursa Malaysia in May, 2012. Nevertheless, just 4 months before the world crude oil prices fall in 2014, Tan Sri Mokhzani through its holding company, Khasera Baru Ltd has sold 190.3 million shares for RM820 million in SapKen and later he resigned from the board of directors in 2015 but still retained a portion of his stake in SapKen. In March 2017, SapuraKencana Petroleum Bhd has changed its name to Sapura Energy Berhad (SE). At the end of 2017, Tan Sri Mokhzani had offered to sell 605 million shares equivalent to 10.1% in SE. At that time, SE shares were held by two individuals through Sapura Holdings Sdn Bhd namely the CEO, Tans Sri Shahril Shamsuddin and his brother Datuk Shahriman Shamsuddin who controlled 16%. In addition, majority shares were held by EPF, PNB and KWAP. In 2019, PNB has increased its investment of RM2.68 billion in SE which made PNB the largest shareholder with a 40% stake. The EPF has disposed of its shareholding since 2018. The current CEO of SE is Datuk Mohd Anuar Taib who previously served in the oil and gas sector for 30 years at Petronas (Upstream Business) and Shell operations. The shareholder expects the new management would overcome the problems and demand to have a return at least equivalent to the unleveredcost of capital which estimates at 8%.

SE Financial Outlook Year 2021

The Group recorded a loss after tax of RM160.3 million in FY2021, a significant improvement on the RM4.6 billion loss-after tax posted in the previous FY2020. The Group registered three profitable quarters in FY2021, before recording a loss-after-tax of RM215.3 million in the fourth quarter, due to lower project margins in its Engineering & Construction ("E&C") business segment. During the quarter, the E&C segment sustained additional costs brought about by COVID-19 and by working through the monsoon season. But the largest portion of SE losses recorded last year was the result of the depreciation value of its assets, not merely the actual operating losses.

Group revenue for the fourth quarter of FY2021 was RM1.4 billion, slightly higher than the RM1.3 billion generated in the third quarter of the same year. The Group's revenue declined 17 percent year-on-year to RM5.3 billion compared to the RM6.4 billion recorded in FY2020. This is reflective of the pandemic's disruptive impact on the Group's business, following shocks to the oil and gas market and radical adjustments to the industry's standard operating procedures.

The financial impact of the pandemic on the Group is estimated to be about RM286 million, while working during inclement weather cost the Group an additional RM303 million. The estimate includes supplementary expenses due to supply chain delays, quarantine restrictions on crew and vessels, mobilization costs, and regular COVID-19 testing on employees at all workplaces, onshore and offshore. To date, the entire COVID-19 costs, and RM149 million in weather-related costs, remain unrecovered. The Group will be collaborating with clients to acknowledge and resolve these costs in the current financial year ('FY2022").

Issues and Challenges Faced by SE

The question is SE recoverable?

If Petronas, or any government investment company helps SE this time, will that be the last "help" or just provide temporary breathing assistance only?

Such a large company deserves to be saved. SE started to lose when they changed their core business from services provider to PSC player (owner of a block in oil and gas for upstream) when they start making Petronas from their paymaster to the competitor. Previously, most of their job contract is secured with Petronas. This is a problem because they do not have the capacity of a giant player.

In 2018, SE has already made a capital raising of RM4 billion through redeemable convertible preference shares (RCPS-i) and rights issues. Through this activity, PNB has disbursed RM2.67 billion. SE has cash and equivalent of RM717 million and its total debt is RM11.66 billion. The order book is RM6.6 billion.

SE used to be the second-largest company in the world worth RM30 billion, so it is normal to make a large loan of RM10 billion. The problem is in 2015-2018 when the oil prices fell, the oil producers blocked and terminated some projects causing SE to lose its source of income. But in 2019, the oil prices start to rise and PNB decides to inject RM2.7 billion. SE needs an additional RM2 billion for working capital but was rejected by local banks. As a result, SE failed to get the Petronas project. PNB is no longer interested to inject further the soft loans instead it wants SE assets to be sold, but this effort is not easy to do when the country is hit badly by Covid19, prolonged lockdown and emergency ordinance.

SE revenue fell sharply from RM1.45 billion to RM450 million partly because the bank facility for SE working capital was discontinued in October 2021. If there is no working capital, SE unable to pay vendors and deliver the existing contracts to generate income. In other words, it is difficult for SE to operate and if the existing contract is delivered late then the customer will impose various late penalties on SE due to late delivery of contracts. Further, no contract to secure by a company that is in such severe financial constraints and fails to pay its working capital.

Industry observers felt that SE might well be on its way to becoming a Practice Note 17 (PN 17) company if it was not able to convince lenders. According to banking sources, Sapura Energy had paid the banks over RM15 billion in principal repayments, interest, and fees over the past eight years.

"With so much already paid and continuing to be paid, it looks like that is the hiccup they are facing in trying to repay vendors and keep the business going at the same time," a source said.

Sources shared that SE was in talks with several banks to ensure it had enough to pay its vendors and continue work. However, it seemed that while the banks had been collecting their dues from SE, they did not seem to be too keen to extend a lifeline. The vendors, especially those small companies in places like Sitiawan, Manjung, Pasir Gudang, Labuan, and Miri, will ultimately suffer if the bank facility is discontinued. SE's problem is not that it cannot secure a new contract or does not have the ability to work on the project but only because of financial liquidity problems.

Prior to the year 2020, SE's annual revenue was between RM6 billion to RM7 billion per year. What would happen to the country's economy and oil gas sector if this huge company suddenly went bankrupt just because the banks, PNB, and the government did not help SE to alleviate the cash flow problem on its working capital?

So, the government and Petronas can no longer wait to act if they want to save the investment of PNB and Malaysian oil and gas services companies. The government's immediate direction whether to give a soft loan to SE or request Petronas to take over will boost the confidence of customers, vendors, banks, and investors in SE to avoid the constraints become worsening.

SE Recovery Plan and Future Prospect

SE CEO Datuk Anuar Taib said the group had drawn up a restructuring plan to recover and regain its financial position. He added that the assets are up for disposal at present including the LTS3000 and other SE vessels.

"The total assets and their values are expected to be finalized by the end of this month. The response from potential buyers is very encouraging and we expect to be able to dispose of the assets at a good value,"he said during Sapura Energy's virtual media briefing yesterday.

According to him, SE is upbeat about the asset divestment strategy and confident that the group will benefit from the exercise to address the short-term liquidity challenge faced by its operations. These include expediting commercial settlement of contract claims with clients, negotiating with lenders for support through existing facilities, and discussing with vendors on outstanding payments. However, the group has not set any financial target for its divestment strategy as the group has to review its core and non-core assets first.

SE assets are very specific to the oil and gas sector. The value is also high. If SE is preparing assets for sales at a forced price or fire-sale price, foreign companies may take advantage to buy the assets at cheap prices. Why do we want to allow the assets needed by the country's oil and gas sector to be sold to foreign buyers at cheap prices? Building the strength of a company is not by selling assets at a cheap price but by ensuring that existing assets are used as best as possible to generate profits.

QUESTIONS:

1. What kind of business model in SE?
2. Based on the cited article in reference to the directors' report and audited financial statements, discuss the following:

• i. What is the major business problem faced by SE?
• ii. How the Covid19 pandemic has worsened the condition of SE?
• iii. "There is a possibility of SE may fall under financial distress". Do you agree?
• iv. Recommendations that can help SE to reduce its financial distress.