More than a lifeline for Sapura Energy

SAPURA Energy Bhd (SEB) is in the limelight yet again – this time due to the government’s investment in SEB in the form of redeemable convertible loan stock (RCLS) worth some RM1.1bil.

The investment will be made by Malaysia Development Holdings Sdn Bhd, a special-purpose vehicle (SPV) under the Finance Ministry.

Much has been said about whether this is a government bailout and whether it is justified to use taxpayers’ monies to rescue or assist a public-listed company, which is more than 40% owned by Permodalan Nasional Bhd (PNB). However, most analyses failed to take into account why SEB is an important corporation within the Malaysian context and as part of the oil and gas (O&G) ecosystem.

The SEB story

SEB, formerly known as SapuraKencana Petroleum Bhd, was a darling of the market when two Malaysian-born O&G players came together to create the country’s largest integrated O&G player. It was once ranked fifth globally by asset value covering 90% of the oilfield services value chain, including drilling, engineering, procurement and construction, transportation and installation, and marine services.

With the merged entity and stronger capital base, SEB was able to acquire capability and capacity that allowed it to compete globally. Post-merger, being one of the largest integrated O&G companies, SEB diversified from being over-reliant on Petroliam Naisonal Bhd (PETRONAS) contracts.

SEB grew with more than an 11,000-strong workforce and presence in over 20 countries. After all, at that time, it had a balance sheet of more than RM6.3bil in shareholder funds and total assets of more than RM15bil when it closed its first financial year-end in January 2013.

With global oil prices soaring past US$100 per barrel, SEB saw an opportunity to extend its market reach by acquiring Seadrill Ltd’s tender rig business in a deal valued at US$2.83bil (or RM8.75bil based on the exchange rate of RM3.0918 then), which was funded partially via issuance of 587 million new SEB shares and bank borrowings.

The Seadrill deal was done in April 2013. Six months later SEB acquired Newfield Exploration for almost US$900mil or RM3bil. The two major acquisitions effectively meant SEB bought some US$3.73bil in assets worth some RM11.75bil, of which 90% was funded via borrowings, based on the exchange rate at the time.

Gyrating oil prices

When it comes to investing or expanding a business or market reach, whether it is corporates or individuals, decisions are always made based on available information at that particular time.

Of course, it is also driven by expectations and forecasts as to the value enhancement that a particular asset acquisition would bring to the company.

Rising crude oil prices meant SEB acquired Seadrill and Newfield not only at the right time, but was also seen as a strategic move, since it allowed a Malaysian O&G company to enter the international market and diversify from PETRONAS and Malaysian contracts.

This can’t be denied as even the investment fraternity welcomed SEB’s acquisitions, which saw its share price hit record highs as analysts maintained their “buy” calls with even higher target prices.

However, as oil prices collapsed and fell below US$30 per barrel by early 2016, SEB’s fortunes turned topsy-turvy. It got hit by impairment charges related to the acquisition of Seadrill and Newfield, as well as other assets.

Worse, as the ringgit weakened, SEB’s dollar liabilities in ringgit terms soared due to huge borrowings taken to finance the acquisition of the two prized assets.

Hence, it was mostly factors beyond the control of the company that resulted in severe damage to SEB’s balance sheet and fortunes.

The weaker ringgit caused the company to be heavily indebted while the debt-funded strategy for the overseas assets acquired was poorly crafted.

One can clearly see the reasons why the company collapsed, but there could have been more robust risk management strategies, for instance, adding guardrails for how much debt to take and entering hedging arrangements to mitigate foreign exchange risk.

PNB-led management

When Permodalan Nasional Bhd (PNB) entered the picture and emerged as the single largest shareholder a little over six years ago, it was PNB and its nominee directors as well as key leadership that steered the SEB ship at least over the past five financial years.

During this period, SEB continued to report losses of RM5.5bil, and as much as RM17.5bil inclusive of impairments.

SEB’s shareholders’ funds too were severely affected as the positive position of RM9.2bil turned into a deficit of RM4.2bil by the end of the last financial year ended Jan 31, 2024.

SEB has also seen a change in management over the past year.

In May last year, a new chief financial officer was appointed and the current managing director took office early last month.

Debt restructuring

The Corporate Debt Restructuring Committee of Malaysia played a pivotal role in SEB’s debt restructuring exercise.

According to SEB’s public announcement to Bursa Malaysia on Feb 27, various classes of scheme creditors of SEB and 22 of its subsidiaries have approved the proposed schemes of arrangement and compromise as part of its debt restructuring plan.

Under the plan, the unsecured creditors’ claims will be settled via various instruments with only 7.05% of the outstanding amount being permanently and irrevocably waived. The balance will be settled via conversion into SapuraOMV debt (20.22%); 46.98% into sustainable debt, 15.91% via the issuance of Redeemable Convertible Unsecured Islamic Debt Securities; and 9.84% in the form of new SEB shares.

To recap, based on SEB’s latest quarterly reports as at the end of October 2024, the company has some RM10.7bil borrowings and RM1.79bil in cash, deposits and bank balances. The company’s balance sheet is severely strained with a deficit in its shareholders’ funds amounting to RM3.69bil with RM17.5bil in accumulated losses sitting in its books.

Time for rehabilitation

As the debt restructuring exercise has been approved, the RCLS by the government will help to address the debts to local vendors as well as ensure employment to more than 50,000 industry-related jobs.

The RCLS is unique in that it can either be a debt owing or if not paid by SEB, will result in the government’s SPV emerging as the single largest shareholder, dethroning PNB’s pole position.

As SEB’s current order book stands at RM8.7bil and with the debt restructuring coming to its final journey, SEB is poised to turn around, mainly due to a cleaner balance sheet and a significant reduction in interest payments.

It has been difficult for SEB over the last few years mainly due to the legacy and baggage that PNB had to inherit from the previous misfortunes that were beyond SEB’s control.

With the debt restructuring plan well in place, the strategic investment of RCLS is seen as the closure that SEB needs to move forward.