Publication Source: Focus Malaysia

Sapura Energy Bhd ended Jan 31, 2019 (FY19) in the black with a net profit of RM207.5 mil versus a net loss of RM2.5 bil in the previous year.

However, the return to profitability was driven by one-off gains which means the oil and gas player actually saw a core loss of about RM945 mil, according to analysts.

Nonetheless, the company believes the tide is changing for them, buoyed by a recovering industry and strong orderbook, which should lead to better utilisation of its assets.

Sapura Energy notes that its orderbook has been growing and is up 15% year-on-year as at end FY19.

“For FY19, new contract wins of RM9.3 bil have lifted the orderbook to RM17.2 bil, which is the highest in two years.” it says in emailed responses to questions posted by FocusM.

The company says these projects are at the early stages of execution and are moving from the engineering and procurement phase to the fabrication and construction portion.

“(As this happens), the group expects to see and increase in the utilisation of assets. It is a norm for any turnkey business to experience a lag of about six to 12 months as project execution gradually ramps up. Earnings recognition is usually backloaded.” the oil and gas player point out.

In FY20, the company says it is planning to do more of the same in terms of growing its orderbook.

Sapura Energy continues to aggressively pursue new opportunities in the Middle East, Africa, Asia Pacific, Europe and the Caspian, and the Americas, with active bids of approximately US $11 bil (RM 45.1 bil).

“The expanding orderbook and focus on execution are expected to further boost asset utilisation, thus contributing to improving our financial performance.” it adds.

Leaner and flexible

The company believes that several key steps taken in FY19 mean that it is well positioned to deliver a stronger set of results in its current financial year.

“For FY19, Sapura Energy focused on strengthening its balance sheet and positioning the group to capitalise on emerging opportunities.” it says.

Recall that the company undertook major corporate exercises and raised about RM7.6 bil, which helped reduce its net gearing to 0.6 times.

President and group CEO Tan Sri Shahril Shamsuddin said previously that the exercises had enabled it to reduce its net gearing and provided the financial flexibility for the group to bid for and execute higher-value projects.

It also sold a 50% stake in its exploration and production business to Austria-based OMV Aktiengesellschaft, to form a strategic partnership, SapuraOMV Upstream.

Sapura Energy says the paring down of its gearing level will give it more financial flexibility to bid for more contracts and to execute higher-value projects. The deal with OMV will help it unlock the value of its E&P segment.

“The newly-formed strategic partnership, SapuraOMV Upstream, will see the partners leveraging on their strengths to build a leading global independent oil and gas company.

The development of the SK408 gas fields (Gorek, Larak Bakong) are on track for first gas by the end of FY20, with a significant ramp-up in FY23.

“(While) exploration activities for new acreage in Mexico, New Zealand and Australia will add further potential opportunities for the business,” it adds.

Sapura Energy offers a positive outlook on the industry which it says is showing signs of recovery.

It adds that stronger industry fundamentals are encouraging investments, particularly in developing new oil and gas fields.

This, in turn, should drive and increase in activities as new projects are being sanctioned globally, it suggests.

“Sapura Energy has been actively bidding …. (and) is currently bidding for approximately US $11 bil (RM45.1 bil) worth of projects, as compared to US $2.3 bil back in FY17.”

In line with the company’s optimism, analysts largely seem to concur that Sapura Energy could potentially be on the cusp of a revival.

Revival ahead?

Several analysts are starting to turn positive towards Sapura Energy, believing that better days might be ahead after it spent much of FY19 undertaking kitchen sinking activities and raising funds to lower its gearing levels.

An analyst with local brokerage agrees with the company’s assessment that it is better positioned to secure jobs given its healthier gearing levels.

“I am turning positive on Sapura Energy following the cash infusion it received last year,” he notes. “This, combined with higher oil prices, should translate to more activities from Petronas and other oil majors.”

Maybank Investment Bank Bhd’s Desmond Ching is also optimistic on the back of lower gearing levels and the better operational outlook.

“Sapura Energy’s net gearing stood at a manageable 0.6 times as of end – January 2019, which is a positive. Alongside learner financials, its operations are also turning for the better.

“Its bid book has tripled to US $11 bil now, with greater concentration in the Middle East and Africa markets. And its order backlog is now at RM17.2 bil and still growing.” Ching notes in a recent results report.

Challenging climate

However, not everyone is bullish MIDF Research has downgraded the counter following its FY19 full-year results despite the improving industry outlook.

It believes that Sapura Energy will continue to find the operating climate challenging.

“We note that the operating environment will remain challenging for Sapura Energy due to the persistent combinations of mismatch of revenue recognition and operating expenses as well as (its) asset utilisation.

“This is further exacerbated by the margin compression experienced by the engineering and construction segment. This is despite the robust orderbook replenishments. As such, we are downgrading our recommendation on Sapura Energy to neutral.” says the brokerage in its recent results report.

Sapura Energy has been trading with a 52-week band of 25.5 sen and 91 sen. The counter fell towards the end of August 2018 and has yet to recover to that level. It closed at 34 sen on April 10.

The company believes that at current valuations, the counter still offers value to shareholders. “The group’s net assets as at 4QFY19 stand at RM13.8 bil, which translates to a book value of 87 sen per share.

“As at closing on April 5, 2019, the price to book (value) is on 0.41 times which provides an opportunity for investors to realise value in view of the improving fundamentals of the company.” it opines.