SapuraKencana Petroleum – the emerging powerhouse

By Jose Barrock

On the local bourse, it is impossible to ignore SapuraKencana Petroleum, with its huge asset base, large oderbook that’s bursting at the seams, and its more or less global presence. KiniBiz looks at the company and what lies in store for the giant oil and gas outfit.

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It’s not often — or to put it bluntly — down right rare, for Malaysian companies to get acknowledged worldwide, let alone by the likes of Forbes, which is among the top business publications in the world.

Nevertheless, in end November this year — in China — SapuraKencana Petroleum’s president and chief executive officer Shahril Shamsuddin received the Forbes Asia’s Fabulous 50 Award in the Asia’s Best Big Public Company category.

The companies were analysed based on revenues, profits, returns on capital, share prices and outlook. SapuraKencana was the only Malaysian company among the 50 winners this year, from a pool of 1,200 candidates.

Without a doubt the company has morphed into a giant of sorts, with a global presence in some 21 countries, year to date the company’s share price has gained some 40% to a record high of RM4.50, giving the company a market capitalisation of almost RM27 billion, its orderbook is bursting at the seams at RM23 billion, while its tender book, analysts say stands at a whopping RM24 billion.

Norziana Mohd Inon, CIMB Investment Bank’s oil and gas analyst, has SapuraKencana as her top pick in the oil and gas sector, and she pegs a target price of RM6.65, more than a 45% premium to the current trading band.

“Accumulate the stock. SapuraKencana is the most dynamic company in our oil & gas portfolio given its transformative developments that have led to solid earnings visibility and a robust three-year EPS CAGR (earnings per share compounded annual growth rate) of 43%,” she said in a report late last month.

For its nine months ended October this year, SapuraKencana posted net profits of RM749.7 million on the back of almost RM6.5 billion in revenue. Earnings per share (EPS) for the nine months in review stood at 13.2 sen.

CIMB for the year ending January 2014, forecasts SapuraKencana raking in RM904.5 million from RM8 billion in sales. EPS meanwhile is pegged at 15.1 sen for the year ending January 2014.

Interestingly enough the bank backed research house has SapuraKencana raking in as much as RM1.6 billion in net profits from RM10.9 billion in turnover for FY1/2015.

As at end October this year the company had cash and bank balances of RM1.3 billion, while on the other side of the balance sheet SapuraKencana had short term debt commitments of RM8.3 billion and non-current borrowings amounting to about RM3.4 billion.

According to CIMB, SapuraKencana’s net gearing level at 125% is not a problem.

Good asset base

To its credit, SapuraKencana has a whole host of good assets. Among the most prominent are its 24 tender rigs, which makes it the largest tender rig operator in the world with a 56% market share of the business.

The tender rigs came about from a US$2.8 billion integration exercise where SapuraKencana acquired its substantial shareholder Seadrill’s assets, via a mix of cash and shares. The acquisition was concluded recently in this April.

According to Norziana of CIMB, the tender rigs contributed some 51% to SapuraKencana’s nine month core net profit of RM679 million.

Another game changer in the pipeline is SapuraKencana’s plan to buy Newfield’s assets parked under  Newfield Malaysia Holdings. At present SapuraKencana’s shareholders have given the proposal the green light, while oil major Petroliam Nasional (Petronas) is still evaluating the proposal and has yet to give its blessing for the acquisition.

According to CIMB the US$898 million (RM2.8 billion) acquisition of Newfield could start contributing to SapuraKencana’s bottom line as early as FY14/15, “giving SapuraKencana another strong profit boost and a robust three year EPS CAGR (earnings per share compounded annual growth rate) of 43%, doubling the sector’s average of 23%.”

The company is also slated to receive soon, two new derrick lay barges, the Sapura 3500 and the Sapura 1200, adding on an existing fleet of four derrick lay barges.

Kenanga Investment Bank foresees SapuraKencana going for as many as two to three risk service contracts (RSC) to develop marginal oil fields, but is uncertain which fields the company is eyeing.

One that has been mentioned before is Bubu, where the company was slated to partner Petroliam Nasional’s Vestigo Petroleum Sdn Bhd, but there has been almost no news on this lately.

This will add on to the existing Berantai field which the company bagged as a RSC with Petrofac Ltd in early 2011.

SapuraKencana also has a 273 acre fabrication yard facility in Lumut, Perak which can undertake large and extensive projects, including central processing platforms and other related structures. The company also has a 50% stake in Labuan Shipyard and Engineering Sdn Bhd.

Strong shareholders

The top three shareholders of the company are Shahril Shamsuddin and his brother Shariman with 16.71%, held via their vehicle Brothers Capital Sdn Bhd, Mokhzani Mahathir, who has about 13.27% under his private company Khasera Baru Sdn Bhd and Norwegian billionaire John Fredriksen who has 12% held by Seadrill Ltd.

Pension fund Employees Provident Fund or EPF has about 11.9% in SapuraKencana.

According to Bloomberg, Fredriksen was worth US$13.2 billion as at end September last year, manages the world’s largest fleet of super tankers, has some 128 other ships which carry various other commodities along with liquefied natural gas or LNG, and controls deep-water drilling company Seadrill.

It is understood that some of SapuraKencana’s successes, landing jobs in Brazil, etc are a result of connections.

The driving force behind the company however is Shahril who is the president and chief executive officer.

Shahril was instrumental in the Sapura Group buying 39% of Crest Petroleum (the forerunner to the giant today) back in 2003, forking out RM105 million or RM3.60 a share to debt ridden Renong. The company was renamed SapuraCrest Petroleum, reflecting the new controlling shareholder.

Then in May last year SapuraCrest Petroleum and Mokhzani’s flagship Kencana Petroleum merged in an RM11.85 billion exercise.

A special purpose vehicle Integral Key Sdn Bhd acquired all the assets and liabilities of SapuraCrest Petroleum for RM5.87 billion and Kencana Petroleum for RM5.98 billion, and issued some five billion Integral Key shares priced at RM2, and dished out RM1.84 billion in cash.

More recently Mokhzani and his lieutenant, Yeow Kheng Chew known as KC Yeow, relinquished their executive positions in the company, opting for non-independent non-executive directorships.

While insiders say that there is nothing amiss in the duo stepping down from their executive roles, market talk had it that both Shahril and Mokhzani have had a difference in opinion, largely stemming from Mokhzani’s RM100 million private investment into Yinson Holdings for a 14.6% stake, which some parties deemed a conflict of interest.

Including prior acquisitions Mokhzani has about 18.5% in Yinson.

In a response to a local daily however, Mokhzani said, “The ‘non-executive’ designation simply means I’m not involved in day-to-day management activities and decisions anymore.

“However, as member of the board, my responsibilities towards ensuring management manages the company properly and prudently in the interest of shareholders and stakeholders remain undiminished,” he had said.

While the market talk—accurate or otherwise—may persist, what is certain is that SapuraKencana is likely to continue its growth trajectory in the coming year, making it a company to watch out for.

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