By Khairul Khalid
SapuraKencana is weathering the oil crisis by implementing aggressive cost-cutting measures, but can it also win RM6 billion new jobs yearly under turbulent conditions?
Business model: In July 2003, the Sapura group led by the then 42-year-old Shahril Shamsuddin (currently SapuraKencana chief executive officer or CEO) acquired Crest Petroleum for RM105 million from a debt-ridden Renong.
Sapura, which started off as a telecommunications company, was founded by Shahril’s father Shamsuddin Abdul Kadir.
In 2011, an RM11.8 billion merger between SapuraCrest Petroleum and Kencana Petroleum resulted in SapuraKencana Petroleum, the country’s largest private oil and gas (O&G) player. Kencana Petroleum was the vehicle of Mokhzani Mahathir, son of former prime minister Dr Mahathir Mohamad.
SapuraKencana was listed on Bursa Malaysia the following year. Based on a UOB Kay Hian (UOBKH) report dated June 16, 2015, it has a market capitalisation of RM14.5 billion.
SapuraKencana is now a full-fledged O&G upstream and integrated services and solutions provider. It has a global presence in 20 countries with businesses covering the entire value chain of exploration, development, production, rejuvenation, and decommissioning and abandonment.
In 2014, SapuraKencana purchased tender rigs from its 12% shareholder Norway’s Seadrill Ltd for US$2.9 billion and acquired US company Newfield Exploration Co’s Malaysian assets for US$898 million.
With its Seadrill assets, SapuraKencana is now the world’s largest operator of tender rigs which are used for drilling oil. Currently, it has an order book of RM24.5 billion, almost the same amount as its tender book.
A big chunk of its order book is from South America (51%), especially Brazil. This is followed by Malaysia (31%), Southeast Asia (12%), Africa (3%), Australia (2%), and North America (1%).
On May 15, 2015, SapuraKencana posted net profit of RM260.7 million, a 49% drop year-on-year. Revenue also fell 7.6% year-on-year to RM2.2 billion.
Overall, the weaker financial results were attributed to the volatile energy prices that have seen the price of Brent crude oil (a widely used benchmark) plunge from US$115 per barrel last year to just above the US$60 level currently.
Lower oil prices have hit SapuraKencana’s profits especially at its energy, and engineering and construction divisions.
Beginning this quarter, the company has reorganised and streamlined its business divisions into engineering and construction, drilling, energy, and corporate.
Due to the sudden fall in oil prices, SapuraKencana is undergoing a significant cost optimisation exercise and has adjusted its capital budget based on an oil price of US$55 per barrel to protect its profit margins.
It is allocating RM1.5 billion for capital expenditure in 2015 and is targeting at least RM6 billion worth of jobs, at least for the next two years, to replenish its current order book.
Its fabrication yard utilisation rate, currently at 75%, could go down to as low as 25% next year if SapuraKencana does not achieve this target of order book replenishment.
Year-to-date, SapuraKencana has won US$269 million (RM995 million) worth of new projects in Mexico, Indonesia, India, and Vietnam. It is also expected to win a US$280 million job at the phase three redevelopment of the Mumbai High South oilfield in India.
SapuraKencana has announced plans to raise up to RM7 billion by issuing a 30-year multi-currency Islamic bonds (sukuk murabaha). These funds will be utilised to refinance existing debt and other business requirements.
Shareholders and management: According to a UOBKH report dated June 16, 2015, SapuraKencana’s major shareholders are Sapura Holdings Sdn Bhd with 16.7%, Sapura Technology Sdn Bhd with 15.9%, and the Employees Provident Fund with 13.3%.
The two largest individual shareholders of SapuraKencana are its co-founders, CEO Shahril and Mokhzani.
Share performance:
What analysts think: Many analysts are still optimistic about SapuraKencana despite the uncertainties in the O&G industry.
Analysts such as MIDF, Hong Leong, TA Securities, and UOBKH have “buy” recommendations for SapuraKencana at various target prices.
UOBKH said that SapuraKencana’s initiatives at streamlining operating costs are beginning to bear fruit and have improved margins.
“We think SapuraKencana’s ability to be ahead of peers, in terms of cost reduction, is not yet appreciated by investors. We believe a 16% modest price upside is fair as long-term prospects will be capped by the uncertainties in the gas field valuations.
“Despite its high correlation to oil prices and its status as an exploration and production player, SapuraKencana’s long-term angle is gas play (and not a direct oil play) as more than 90% of its reserves are gas,” said UOBKH.
On the other hand, TA Securities has a “hold” recommendation on SapuraKencana. It cautioned that weak crude oil prices will continue to drag the company’s earnings this year, but the segment will remain profitable due to the company’s cost-cutting exercise.
“The longer-term outlook for the segment is positive. SapuraKencana is still in the process of acquiring new assets in Sabah and Vietnam, and also working on developing over three trillion cubic feet of gas reserve. This could materialise soon with an initial gas sales agreement on the cards,” said TA Securities.
Earnings forecast:
StockStalk: The O&G industry is still grappling with the new realities of lower oil prices.
Many are struggling, but to its credit, SapuraKencana has reacted swiftly and implemented significant cost-cutting measures to preserve its profit margins under a rapidly changing business climate.
Potential investors will be reassured that despite the company’s size, SapuraKencana’s management has proven nimble enough and moved quickly to handle the tremors of the oil crisis.
Most analysts concurred that SapuraKencana, mainly due to its strong management, large order book, and assets worldwide, is still a good long-term investment.
However, investors will also have to bear in mind that much of SapuraKencana’s current predicament, like others in the O&G industry, is due to factors beyond its control. The prices of crude oil is dependent not just on economics of basic supply and demand, but on volatile geopolitics too.
As an AllianceDBS analyst report suggested, every US$5 change in crude oil prices would translate to roughly a 10% earnings impact for SapuraKencana. As we have seen in the last 12 months, this could go either way in the blink of an eye. This makes a punt on SapuraKencana, regardless of the fact that it is widely considered to be a well-oiled organisation, not for the faint of heart.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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