This article first appeared in The Edge Malaysia Weekly on February 13, 2023 - February 19, 2023

THE severe financial problems at Sapura Energy Bhd have left many of the Malaysian Oil, Gas and Energy Services Council (MOGSC) members — who are the oil and gas (O&G) giant’s contractors or subcontractors — high and dry.

MOGSC, which represents 600 O&G companies, has written to Prime Minister Datuk Seri Anwar Ibrahim to seek government intervention in the recovery of as much as RM3.3 billion in debts that Sapura Energy owes to its members.

In the letter sighted by The Edge, MOGSC president Syed Saggaf Syed Ahmad asks that all vendors and suppliers that had undertaken work for Sapura Energy recover in entirety sums owed to them. In short, the MOGSC members are against taking any haircut.

This plea to Anwar, who is also the finance minister, comes as Sapura Energy is finalising a scheme of arrangement with creditors, including MOGSC members.

“Unfortunately, the vendors and suppliers are in a precarious position, where in the overall supply chain, they are deemed as unsecured creditors and will be the last to be resolved. Under normal circumstances, in any restructuring scheme, vendors and suppliers will have to agree on ‘haircut payments’, which sometimes would result in a 70% reduction from the outstanding [sums].

“The financial institutions, on the other hand, despite having stronger balance sheets to treat losses, will demand a maximum amount from this restructuring scheme. For the record, as at December 2022, the cumulative shareholders’ fund for all major banks in Malaysia is about RM300 billion.

“If the government is to intervene in Sapura Energy’s case, unsecured creditors will be given more consideration and eventually recover the sum owed to them,” Syed Saggaf says.

In March last year, the High Court granted the Practice Note 17 company and 22 of its wholly-owned units orders under sections 366 and 368 of the Companies Act 2016, which enable a company to negotiate with creditors, and strike a compromise putting on hold any winding-up petitions or other demands, helping it to engage with creditors without disruption to operations.

About six months later, Sapura Energy submitted its proposed restructuring scheme to the Corporate Debt Restructuring Committee and the financial institutions. Once the scheme of arrangement is finalised, it will form part of the company’s overall restructuring and regularisation plan, which will be submitted to Bursa Malaysia.

It is likely that MOGSC is looking to act before the scheme of arrangement is finalised.

According to the letter by MOGSC, Sapura Energy’s proposed scheme of arrangement presented to creditors had suggested a four-year recovery period to collect the outstanding amount owing with only 5% of this sum to be paid in the first year.

“Since the creditors are made up of mostly small and medium enterprises (SMEs) and mid-tier companies, the risk of them winding up before collecting this sum is real,” Syed Saggaf writes.

Besides, MOGSC also requests a shorter payback period so that its affected members will not suffer from tight cash flow for long.

The Edge understands that the management of Petroliam Nasional Bhd (Petronas) and Sapura Energy are aware of MOGSC submitting the letter seeking assistance from the prime minister.

In the letter, MOGSC suggests that Sapura Energy’s largest shareholder Permodalan Nasional Bhd (PNB) step in once again to recapitalise the beleaguered O&G giant so that it could have money to settle its debts.

Although it might be viewed as a bailing out of Sapura Energy by the government, Syed Saggaf, however, notes that such a move is paramount to ensure the survival of the large O&G services and equipment (OGSE) supply chain.

PNB is the single-largest shareholder holding a 40.03% stake after it pumped in RM2.68 billion when Sapura Energy undertook a recapitalisation exercise consisting of rights issue of shares and Islamic redeemable convertible preference shares in early 2019. Meanwhile, Sapura Holdings Sdn Bhd’s shareholding diluted to 10.55% after the massive cash call.

The spotlight on Sapura Energy’s financial issues has also raised questions as to Malayan Banking Bhd’s (another PNB-owned company) exposure to Sapura Energy.

For its nine months ended Oct 31, 2022, Sapura Energy posted a net profit of RM99.52 million on revenue of RM3.33 billion. Sapura Energy suffered a net loss of RM2.28 billion from RM3.67 billion in revenue a year ago.

However, its improved earnings were mainly due to a net foreign exchange gain of RM401.45 million and gains on disposal of property, plant and equipment of RM8.67 million. Its finance costs for the nine months amounted to RM436.87 million, while its operating cash flow was a negative RM81.02 million.

As at end-October 2022, the group’s cash balance was at RM763.49 million, while its short-term debt stood at RM10.97 billion, with no long-term liabilities. The group had accumulated losses of RM13.57 billion over the years.

Judging by Sapura Energy’s financial numbers, the odds are stacked against the contractors and subcontractors.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.