COLUMN | It’s all coming back to me now: Sapura Energy [Offshore Accounts]

Photo: Sapura Energy

After looking at the ignominious end of Swire Pacific Offshore, the offshore supply vessel owner sold for a pittance to rival Tidewater (here), we turn our attention this week to another troubled Asia offshore powerhouse: Sapura Energy.

Here’s another business that has run out of room to manoeuvre.

The biggest but maybe not the best

Sapura is the biggest offshore construction company in Asia, the biggest rig owner in Asia outside of China, and a significant domestic producer of oil and gas in Malaysia via a joint venture with Austria’s OMV.

The company owns a swag bag of offshore construction assets, including its flagship Sapura 3500 DP3 derrick lay barge, plus five other derrick lay vessels, three fabrication yards in Malaysia, including Labuan Shipyard, a DP subsea construction vessel (117m LOA Sapura Constructor), three dive support vessels, two anchor handlers, six accommodation vessels including the 300-passenger, eight point moored Sarku-300, which is being advertised for sale), five ROVs, a launch barge, and two survey vessels. Sapura also owns a fifty per cent stake in a deepwater pipelay company in Brazil in conjunction with Seadrill, which owns six magnificent Dutch-built flexlay construction vessels there, each fitted with 250-tonne, active heave compensated cranes rated for 3,000 metres of water depth (here).

Additionally, the company is the largest owner of tender rigs in the world, with seven semi-submersible tender assist rigs and seven conventional tender assist rigs in its fleet, acquired from Seadrill for the princely sum of US$2.9 billion in 2013.

In calendar year 2021, only half of the rig fleet was working, however.

Loss of over US$2 billion for last year

In the video for Celine Dion’s double-platinum power ballad “It’s All Coming Back to Me Now” (here), the Canadian chanteuse runs around a candlelit mansion lamenting the death of her dreams.

“There were days when the sun was so cruel, that all the tears turned to dust,” she cries, “And I just knew my eyes were drying up forever.”

The board of Sapura Energy must be feeling the same. This week saw one of Malaysia’s biggest ever corporate train crashes, as the company announced (here) a stonking net loss of over US$2.1 billion for its full financial year to January 31, taking its cumulative losses since 2017 to over US$3.7 billion.

Sapura reported an operating loss of US$525 million, plus a US$780 million provision for the impairment on goodwill (See our discussion of James Fisher for an explanation of goodwill accounting here.), and a US$550 million provision for impairment on property, plant and equipment in FY2022. Assets on its books are worth much less than before, and it is bleeding cash from its construction and installation activities.

The graph here sets the precipitous decline in revenue and the bi-annual write offs of the group in context:

Liquidity crunch hits customers

Sapura Energy’s Chief Executive, Datuk Anuar Taib, described the year as one of the most challenging years in the group’s history, as Sapura faced what he described as, “an unprecedented liquidity crunch.”

Already, Sapura’s customers are feeling the crunch from this cashflow crisis. In February, the company announced (here) that it had decided to withdraw from the Yunlin offshore wind farm installation project in Taiwan, following what it described as an unspecified but “material breach of contract” by its client, Yunneng Wind Power. It has now taken the client to arbitration in Germany.

Earlier this month, another customer, India’s state-owned Oil and Natural Gas Corporation (ONGC), had to step in and make payments directly to a Sapura subcontractor to recover an offshore jacket stranded at PetroVietnam Technical Services Corporation’s (PTSC) shipyard in Vung Tau, Vietnam, after Sapura was unable to pay PTSC for the structure. Only when ONGC paid the overdue sums directly to the Vietnamese company did PTSC permit the jacket to be released from its yard, and it is now en route to the Krishna Godavari basin offshore India, delaying first production from ONGC’s project.

If not Petronas, who?

These problems with project execution and delivery, stemming from Sapura’s cashflow problems, threaten to drive away new customers, and send the business into a “doom-loop”.

In December, Malaysian state oil company Petronas did not short list for the front-end engineering and design (FEED) contract for phase two of the Kasawari project. Upstream reported that Sapura’s “financial woes” were the determining factor for Petronas choosing Malaysia Marine and Heavy Engineering and Hyundai Heavy Industries as the final bidders. And if Malaysia’s own state oil company won’t choose Malaysia’s largest offshore contractor, run by Petronas’ own former upstream boss, why would other customers take the risk?

The causes

“Our current financial constraint is a culmination of many factors,” Datuk Anuar commented, “including contracts accepted on onerous terms and operational issues exacerbated by [the] Covid-19 pandemic. These have resulted in significant losses in many projects, impacting our financial position. Almost all of the project losses were from legacy contracts. The group’s liquidity challenges were also due to an unsustainable debt level and high overdue payables to our vendors, and these challenges became more acute with our working capital facilities suspended since October 2021.”

Sapura is now reviewing its existing contracts to try to mitigate any onerous provisions, and has sought the assistance of the legal system to buy itself some time.

Restraining orders

Most of you will be familiar with restraining orders from acrimonious divorces.

Now, in order to prevent creditors seizing its assets and wrecking what remains of the business, Sapura sought, and was granted, court protection from its creditors on March 10 (here) for itself and 22 of its wholly-owned subsidiaries. The restraining orders under Sections 366 and 368 of the Malaysian Companies Act 2016 prevent Sapura’s creditors from enforcing winding up orders against the company, from seizing its assets, and from arresting its vessels, for a three-month period up until June 10.

The restraining orders were granted to enable Sapura and its creditors to formalise a debt restructuring, known as a Scheme of Arrangement in Malaysia. These permit the company to continue with its day-to-day business and operations as usual whilst it negotiates with its creditors.

In Singapore, we have seen such arrangements for offshore players last more than five years (here). Let’s hope Sapura can be restructured more quickly now that events have come to a head.

Who’s on the hook?

Not surprisingly, after the restraining order and the massive losses were announced, the company’s stock is now almost worthless. It closed at just four sen (one US cent) on Friday, giving Sapura Energy a market capitalisation of around US$150 million.

State bail-out didn’t work in 2019

The fact that Sapura’s shares are now nearly worthless is rather unfortunate for the Malaysian state fund manager Permodalan Nasional (PNB). PNB’s slogan is, “We strive to enrich the lives of Bumiputeras (ethnic Malays) and all Malaysians for the prosperity of the nation.”

PNB funds own about 40 per cent of Sapura Energy’s shares following a US$1 billion cash call in 2019, when the beleaguered business raised new capital. In total, PNB funds invested MYR2.68 billion (US$639 million) in early 2019, which is now worth about 90 per cent less. Rather than rescuing Sapura and turning a tidy profit on the turnaround, PNB now finds itself in the invidious position of possibly throwing good money after bad.

Either it further recapitalises Sapura a second time, or it sees its investment probably wiped out as creditors swap their debt for equity.

Maybank may have issues?

PNB manages over US$70 billion in total assets, so this is small fry, it claims, but PNB also owns 49 per cent of a bank, Malayan Banking, popularly known as Maybank. There are concerns that Maybank may have further exposure to Sapura in addition to their common shareholder’s equity in each.

One of the lessons of Asia’s many financial crises is that banks are always on the hook when big corporates default, and that state-owned banks like Maybank (and DBS in Singapore) are typically the worst offenders.

The Edge in Malaysia has reported that former CEO Tan Sri Shahril Shamsuddin and his brother Datuk Shahriman Shamsuddin also have a 12.94 per cent equity interest held via their private vehicle Brothers Capital. For many observers, seeing Shamsuddin humbled might be the only saving grace of Sapura’s misfortunes.

The brothers purchased what was then Crest Petroleum, the predecessor of Sapura, from “troubled” Malaysian state conglomerate Renong in 2004, after Renong and its United Engineers subsidiary suffered a financial implosion in 2001. What goes around comes around.

Much too much debt (again)

As with so many indebted offshore companies, the problem is the size of Sapura’s debts, which stood at MYR10.3 billion (US$2.4 billion) in 2021, when the last balance sheet was published. “The MYR10.3 billion of long-term debt is not sustainable,” Anuar admitted to the Malaysian press last year.

We’ve seen this story with every over-leveraged, indebted offshore company since the market crashed in 2015. Their assets are worth less, their cash flows are diminished, and the creditors can never be repaid in full. It’s a story we have told for the big drilling companies, the big construction companies, and the major offshore supply players.

The banks seemingly exposed to Sapura Energy’s MYR10.3 billion debt are Malaysia’s Maybank, CIMB, AmBank and RHB, plus Singapore’s United Overseas Bank, Exim Bank, ING Bank, Sumitomo Mitsui Banking Corporation, Standard Chartered Bank and First Abu Dhabi Bank.

Datuk Anuar has stated that the problems are focused on the construction sector. Sapura said that it expects the drilling segment to perform well under the current market conditions with an average of nine rigs slated to be in operation. Sapura believes that its rig fleet business will continue to generate improved and stable operational cash flows over the coming year, and so it should, as drilling activity increases on the back of US$100 oil prices.

Obviously, the oil and gas division should also be booming with higher oil prices and higher gas prices driving higher profits after Russia invaded Ukraine in February.

Familiar playbook

That leaves Datuk Anuar playing from a familiar story book for the construction business. He’ll need to follow in the footsteps of compatriot Bumi Armada and hold a piecemeal sale of “non-core” assets, he’ll need to negotiate debt reductions/haircuts for the banks, and he may need to spin off the profitable oil and gas division to generate cash.

Likely, a government-linked company will need to step in and re-capitalise Sapura Energy once again. In Malaysia, all roads lead to the Petronas Towers, and Petronas might decide that it is “strategically” important to aid Sapura.

One former Malaysian prime minister, disgraced Najib Razak, has already called for Petronas to act, saying yesterday (here) that just as Petronas bailed out state shipping line MISC in 1998, it should rescue Sapura and its ten thousand employees. The other entity to write a rescue cheque would be state wealth fund Khazanah Nasional Berhad, fresh from its US$890 million bail-out of Malaysian Airlines last year (here). If Khazanah can rescue a dog of a business like Malaysian Airlines for the second time in seven years, it will do whatever its political paymasters demand for Sapura.

Whatever the case, the clock is ticking. Prime Minister Ismail Sabri Yaakob needs to go to the polls in a general election in the next sixteen months, before July 2023. Yaakob took office following the collapse of the government of his rival Muhyiddin Yassin, and the last thing he needs is Sapura – which employs thousands of Malaysians – imploding.

Job losses at the fabrication yards would be political dynamite and will be avoided at all costs. There will be a Malaysian solution, and the business will not be allowed to fail.

My restructuring will go on… and on?

Since the financial demise of Sapura seems to be of Titanic proportions, one can only hope that next on the playlist is a remix of Ms Dion’s classic theme, “My Business Will Go On” (here).

I really feel for Datuk Anuar. He inherited a horrible mess from his overpaid predecessor, the egotistical Tan Sri Shahril Shamsuddin, who headed the company from July 2004 until his spectacular fall from grace in 2021.

Now Datuk Anuar must pick up the pieces and salvage what value remains from the wreckage of Sapura.

With the restructuring and scheme of arrangement he has bought himself time. Perhaps “A new day has come” (here)?

The stock price is all coming back to The Metals Company?

Psst… Want to double your money in just ten days? Well, you should have invested in subsea mining start up The Metals Company on March 4 when the shares bottomed out at US$1.40. On March 14, they peaked at US$3.18, before plunging another 10 per cent back to US$2.71, paring back losses since September’s floatation to over 77 per cent.

Last Friday, the company and Allseas announced that they intend to equally finance all costs related to developing and getting the first commercial subsea mining system into production, estimated at less than €100 million (US$110 million) of additional new capital in total. The pilot nodule collection system developed and currently being tested by Allseas is slated for upgrade to a commercial system with a targeted production capacity of 1.3 million tonnes of wet nodules per year. Production readiness is scheduled for the end of 2024 (here).

Hold on to your hats, however. It’s a wild ride ahead of the company announcing its next set of results on March 24.

Background reading

The full listing of Sapura’s assets is here.

We covered Sapura Energy’s notice of termination on its Taiwan windfarm installation contract in February here.

We recommend The Edge’s 2021 cover story “What went wrong at Sapura Energy?” here.

The Edge also asked “Will PNB invest more in Sapura Energy?” here. We like the publication’s direct style.

For the long and sordid saga of Renong and its state bail out, see CNN’s 2001 coverage here.

Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.