Better prospects for Sapura Energy

It will be a challenge to the group to increase utilisation of its drilling assets to a desirable level of the E&C division

by MARK RAO/ pic credit:

SAPURA Energy Bhd is not expected to return to the black in the near term as the company will face uphill challenges to boost its drilling rig utilisation and weak margins from the engineering and construction (E&C) division.

A local industry analyst said the company took the strategic decision to “cold stack” the majority of its tender assist drilling (TAD) rigs rather than keeping them running, resulting in higher costs for clients when the assets are mobilised again.

This will be a challenge to the integrated oil and gas services provider to increase utilisation of its drilling assets to a desirable level of the division, which is a key revenue and earnings contributor to the group.

“Sapura Energy decided to cold stack its rigs due to its cash-strapped position and the cost associated with keeping these rigs running,” the analyst told The Malaysian Reserve.

“There is a one-off cost to reactivate the rig that is relatively significant and needs to be passed on the client, making tender rates less competitive,” said the analyst.

Companies will decide to “stack” rigs, either via warm or cold stacking, as a cost-saving technique when job prospects are weak. Warm stacking is when a rig or platform is kept running as though it is still operating to keep it work ready, but it will require a small crew.

Cold stacking, in contrast, is when a rig is completely shut down with minimal operational expenses incurred and no crew on board. But the cost to get the asset running again is higher.

The additional cost will be reflected in the pricing of the services.

The industry analyst added that the TAD rigs have limited scope and have to be operated within an existing platform, while jack-up rigs are flexible in deployment.

Sapura Energy has been involved in TAD operations for over four decades and boasts the world’s largest fleet of TAD rigs at 16, according to the company’s website.

In contrast, all seven of Velesto Energy Bhd’s offshore drilling rigs are jack-up rigs. Shares in the drilling and oilfield services provider are up 122% year-to-date, largely driven by higher demand for jack-up drilling rigs and the company returning to black in its last quarter.

The company last secured a US$131 million (RM539.72 million) drilling contract via its indirect wholly owned subsidiary Velesto Drilling Sdn Bhd.

In July this year, Sapura Energy’s management indicated that the company expected to turn profitable when the utilisation of both its E&C and drilling assets crosses the 70% mark.

The industry analyst said the utilisation of the company’s drilling assets was expected to improve from approximately 40% to between 45% and 50% for the third quarter ended Oct 31 this year (3Q19), but was still below the 70% threshold.

Margins from the E&C division remained muted, while the exploration and production (E&P) business has yet to become a major contributor to the company’s books.

Sapura Energy is likely to remain in the red in 3Q19. For 2Q19, the company managed to narrow its net loss by 7.7% year-on-year to RM116.31 million as revenues jumped 87.4% to RM1.93 billion on higher E&C and drilling contributions.

The E&C division enjoyed higher activities in the quarter, while the drilling business registered a higher number of working rigs despite remaining in a loss-making position.

Sapura Energy’s orderbook was reported at RM16.3 billion for the quarter, providing a healthy pipeline of work for the company in the foreseeable future.

The company also sold a 50% stake in its E&P unit to Austria’s OMV AG for RM3.6 billion and raised RM4 billion in funds via a rights issue to pare down its debt and improve its gearing.

Permodalan Nasional Bhd emerged as the company’s largest shareholder with an approximately 40% stake following the rights issue.