1QFY23: Narrowing Core Loss And More Asset Monetisation For Reset Plans
Core loss in 1QFY23 was better than expectation, on significant progress made on
project claims; for the existing contracts, the outlook will improve given that rig
utilisation and O&G prices will be at an all-time high. SAPE remains focused on
ensuring its going concern, ignoring speculation of intervention (ie government). While
debt burden remains high, we still assume a high possibility of SapuraOMV
monetisation (vs rights issue). Upgrade to HOLD. Target price: RM0.06.
RESULTS
• Management views 1QFY23 as the maiden quarter of the reset plans. The core loss is
better than our/consensus FY23 loss forecasts of RM0.5b, and the 1QFY23 EBITDA of
RM250m is also ahead of our previous forecast of RM0.5b. Firstly, cost claims from legacy
projects had made progress, while executing new E&C/O&M contracts. Sapura Energy
(SAPE) gained RM23m late delivery charge reversals and RM93m claims from commercial
settlements. Due to the long process of huge claims, this will be a recurring theme till FY24.
Operationally E&C local yards and key vessel utilisations were at 31% and 25% respectively,
on weak activities typical during monsoon season. Without those claims, the E&C might
have recorded a RM50m LBITDA, still smaller vs historical loss levels.
• Rigs and E&P saw better profits qoq. Cost base for rigs was lowered despite fewer
operating days qoq. Also, SapuraOMV’s profit benefitted from higher O&G prices despite
lower volumes, and the volume impact will continue due to the unplanned shutdown of the
Bintulu MLNG Dua terminal’s Module 5 (for leakages) which is extended till Aug 22.
STOCK IMPACT
• Orderbook improved qoq from RM6.6b to RM8.3b. This represents the group’s ability to win
jobs, even when they had to be choosy and sacrifice competitiveness without giving up on
margins. New contract terms and contingency budgets are also ensured to be of favourable riskreward. SAPE negotiated for better cost reimbursable terms, especially in view of high
commodity prices/inflation risk. On certain E&C contracts, the client may bear the bunker costs
for marine vessels. Another example mentioned is on item procurement where SAPE no longer
sets a ceiling price when charging the client. In the past, if material costs exceed the ceiling price,
the cost difference was borne by SAPE.
• Not expecting any more major provisions for Yunlin contract termination. Overall, the key
strategy remains that SAPE focuses on claiming legacy E&C project claims while winning quality
new contracts. The Taiwan windfarm contract is a special case of multiple cost overrun issues
that forced SAPE to terminate the contract against their client. Hence, most likely none of the
costs are reimbursed yet, and both sides may be preparing to go on an arbitration process.
Significant provisions were already incurred, and as SAPE enforces the termination, this means it
sees a high chance to be legally entitled for the claims.
• The other strategy is to return the rig back to its glory days. SAPE is reducing the rig fleet
from 14 to 11, with rigs T19, T20 and Sapura Setia earmarked for scrap. On existing rigs, a)
Sapura Jaya (which encountered force majeure with low rates during COVID-19 periods), saw its
Angola contract extending by two years; and b) T10, T11 and T12 rigs recently secured five-year
long-term contracts with PTTEP. This means by end-FY23, 10 out of 11 rigs will be chartered
out, with five working in Thailand, and only three rigs left on short-term contracts and SAPE will
enjoy its highest rig utilisation since 2014. Having said that, its financial conditions (constrained
funding without bankers support) will cause delayed startup in two of the PTTEP rigs, by two
months from July-August.
• PN17 and funding relief may depend on any factors… As expected earlier, SAPE is now
under PN17 status, due to its small equity alongside less favourable auditor opinion. The RM10b
loan and bankers/vendor scheme looks like a mammoth task (dragged out by another 6-9
months to Mar 23). But a sustained improvement in profitability, via project claims with rig/E&P
growth, may lead to a positive change in auditors’ opinion by FY23, potentially lifting the first
hurdle on its sentiment (PN17 status).
• …and we rule out likelihood of unwanted rights issue. SapuraOMV’s monetisation is still a
high possibility, based on our observation that: a) 2P reserves and 2C resources are higher vs
2018’s 253mmboe, factoring new concessions secured in Malaysia lately; b) the progress of the
onshore sour gas plant signed between Petronas, Shell and PTTEP last weekend under Bintulu’s
Petrochemical Industrial Park (SISGES project), also means a direct progress on monetising
SapuraOMV’s B14 field (that is tied to PTTEP’s Lang Lebah), and c) PTT’s massive five-year
capex. We see a possibility of PTT becoming a potential buyer, and for prices to be attractive (ie
not pegging to >US$100/bbl oil prices) but also in order to not offend OMV (entry cost of US$1.6b
in 2018), we assume SAPE may consider exiting its stake close to OMV’s valuation of
US$6.3/bbl, potentially freeing up capital of up to RM4b (on its 50% stake).
EARNINGS REVISION/RISK
• Smaller FY23-24 losses, from RM0.5b-0.6b losses previously. We adjusted for better
associate profits from SapuraOMV on higher blended O&G prices of US$80/bbl to reflect the risk
of volume underperformance. EBITDA forecasts are also upgraded by RM0.2b, as we adjust for
better rig outlook and lower rig cost base (11 rig fleet) as well as more consistent claims from
legacy E&C projects.
VALUATION/RECOMMENDATION
• Upgrade to HOLD, diluted target price of RM0.06 (from RM0.02). Our target price is a
combination of the negative net tangible equity of RM0.10/share, with a slightly higher valuation
for SapuraOMV’s monetisation, although for the latter we expect to match OMV’s cost of
US$1.6b. Our target price focuses on management’s efforts, ignoring external speculation of the
government’s/Petronas’ intervention as shareholder, and also ignoring the bankers/vendor
scheme (which may involve heavily equity dilution). We see a more balanced risk-reward given:
a) smaller loss expectations, reflecting the going concern of both the drilling and E&C segments,
and b) SAPE still has the ability to monetise assets, without rights issue.