Meanwhile, Sapura Offshore Sdn Bhd (SOSB) has secured a subcontract from Malaysia Marine and Heavy Engineering Sdn Bhd to transport and instal jackets, piles, bridges and appurtenances at the Bokor Central Processing Platform project. SOSB has also won a contract in India.
KUALA LUMPUR: CIMB Equities Research cut its sum-of-parts based target price to 64 sen as it applies a 25% discount to sum-of-parts on the back of capital-raising plans, which may involve a dilutive rights issue. The previous target price was 89 sen.
It said on Monday Sapura Energy
’s core loss of RM156mil in the first quarter ended April 2018 matched its previous FY19F loss estimate and was almost double consensus’s, significantly underperforming expectations.
“We maintain our longer-term Add rating with re-rating catalysts from the potential recovery in engineering and construction (E&C) and drilling contract awards as oil prices continue firming.
“Having said that, the share price could fall today after the weak results and with the potential threat of earnings per share (EPS) dilution. Our core loss forecasts have been widened 72%-157%,” it said.
To recap, CIMB Research said Sapura Energy delivered a larger-than-expected 1QFY19 loss of RM156mil (vs. a small RM9mil loss in 1QFY18) because E&C revenue recognition was slower than expected while Sapura Energy continued paying higher-than-expected taxes.
The latest set of results was its third consecutive quarter of triple-digit losses, with drilling utilisation falling below 30% for the first time in its history and E&C subsidiaries suffering their third consecutive quarterly loss while energy earnings also fell despite higher gas production and higher oil prices.
The E&C arm delivered an overall pretax profit of RM36.5mil in 1QFY19, an 80% on-year drop as revenue fell 45% on-year.
The E&C subsidiaries have been loss-making for the past nine months, although the 50% Brazil PLSV JV continued to deliver profits on the back of long-term charter contracts.
“Based on today’s order book, E&C revenue is expected to average RM867mil a quarter for the next three quarters vs. RM666mil in 1QFY19 or RM3.3bil in FY19F, still short of our RM4bil forecast unless more contracts are won,” it said.
Sapura Energy’s tender drilling rig (TDR) utilisation fell to only 29% in 1QFY19 vs. 42% in 1QFY18 and 33% during 2HFY18 as old contracts expired and new work was scarce.
Having said that, Sapura Energy secured new work for the Esperanza and Berani rigs lately and the 2QFY19 utilisation is expected to recover to 36%.
“Based on firm contracts secured to-date, Sapura Energy is on track for 32% utilisation in FY19F, which could rise to 37% if all options are exercised.
“Our forecast for 35% utilisation in FY19F is, therefore, reasonable and potentially achievable,” it said.
Gas has been produced from SK310 B15 since Oct 2017 but oil production fell almost 20% year-on-year due to natural depletion. Energy pretax profits fell year-on-year and on-quarter due to cost writebacks on Petronas-operated fields in previous periods, even though the selling price of oil rose.
“Assuming a RM6bil equity valuation and a 30% stake sale, a spin-off of the energy arm may raise RM1.8bil that can be used to prepay part of its RM16.5bil in borrowings. Long-term prospects come from potential increases in SK408 production,” it said.
CIMB Research pointed out Sapura Energy publically stated that it is exploring a potential capital-raising exercise, without specifying the size or type of instrument to be issued.
Sapura Energy’s US$340mil in cash balance as at April 30 is inadequate for the pipeline of large billion-dollar EPCIC projects that it is bidding for.
Assuming a US$500mil rights issue at an issue price of 40 sen a share, it pointed out that five billion new shares may need to be issued, almost doubling its current share base.
“As the EPS dilution may be too large in a pure-rights issue, we expect Sapura Energy to explore the issue of redeemable convertible preference shares or perpetual sukuk as well.
“We are unable to estimate the dilution impact at this stage, which is the biggest downside risk to our Add call, or if the potential E&C contact wins can offset the dilution impact,” it said.
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