Shahril: ‘The more rigs you have, the more chances there will be to mature.
ON Monday night after announcing a US$2.9bil deal that will make SapuraKencana Petroleum Bhd the world's largest tender rig operator, president and group chief executive officer Datuk Seri Shahril Shamsuddin got a phone call from the United States. It was from a fund manager of an institution who just heard about the deal with Seadrill Ltd.
called in last night asking for a placement of a block of shares. And
these are big overseas funds, guys whom we saw in the US recently. Our
company was fresh in their minds and we were at a certain ebitda level
(before the proposed deal) and with this deal, we have crossed the
threshold in terms of size and liquidity of shares,” he tells StarBizWeek.
The non-binding MoU with Seadrill,
once completed, will see SapuraKencana take a 51% share of the global
tender rig business, in the process making the company more appealing to
investors who want exposure to large companies. With 21 tender rigs,
and with its next closest competitor globally having four, the deal
lifts SapuraKencana to another platform.
Analysts too have become bullish on SapuraKencana, with many raising their earnings projections and target prices.
are positive on this deal, operationally and financially speaking. This
exercise instantly transforms SapuraKencana into the largest
tender-assisted rig operator in the world, by fleet size. This is an
earnings accretive deal,” says Maybank Investment Bank in a note after the deal was announced.
raised its forecast of SapuraKencana's earnings per share for its 2014
and 2015 financial years by 24%-30%. It says earnings from the injection
of 10 tender-assisted rigs (TAGs) plus a 49%-stake each in five TAGs
was partly offset by a 7% increase in share capital.
How the deal came about
Prior to the merger between SapuraCrest Petroleum and Kencana Petroleum Bhd,
the former had a working relation with Seadrill after Semdvig, a
company it had a joint venture with, was taken over by Seadrill.
The new-found relationship with Seadrill took off and Seadrill's chairman John Fredriksen
started to work closer with SapuraKencana. He introduced the Malaysian
company to Brazil where it won a US$1.4bil contract from Petrobas to
build and operate three pipe-laying support vessels (PLSVs).
Shahril says discussions then proceeded over combining the rigs SapuraKencana had with that of Seadrill.
said why don't we combine and strengthen our position and instead of
just the five rigs, why don't we look at the whole tender rig business.
About a month ago, we looked at it again very seriously and in the last
two weeks we intensely had negotiations. The deal was closed Friday
night (Nov 2).”
“It's a way for them to refocus and reposition
their business and at the same time help SapuraKencana transform itself
into a very solid high margin business. The tender rig business brings
pretty strong margins and overall what will happen is our margins will
be a bit more robust.”
The tender rigs bought by SapuraKencana
have contracts up to 2019 and an orderbook of US$1.6bil. Furthermore,
the tender rig business is a higher margin business and at 40%, is
larger than what SapuraKencana is currently enjoying. Consolidating the
operations also settles the issue of the company having 2 licences from Petroliam Nasional Bhd.
concern analysts have voiced is that the acquisition of the tender rigs
will change the make-up of the group from an oil and gas service
provider to that of a tender rig operator where the price earnings
multiple investors are willing to pay is lower.
that assumption, saying the acquisition re-inforces the vision of the
company to become a fully integrated oil and gas service company.
our business there are four verticals. There is offshore construction
services, fabrication, drilling and energy. Energy is the one that takes
on all the RSC (risk-service contract) opportunities. And with RSCs,
there are so many services that go into supporting that business and
drilling is one of them. There are a lot of symbiotic relationships
between the verticals to support each other.”
“The more rigs you
have, the more chances there will be to mature. Overheads are spread
over and we get scale. And in this business, it is very difficult to
compete globally without scale. So the choice was very obvious. It is
facilitated by the fact the relationship was good, the assets are young,
it has a good backlog and it's margin enhancing and value accretive,”
What it means for SapuraKencana
from being more profitable, the scale of the business will allow
SapuraKencana to be more competitive in its bids. But it's the balance
sheet size that was created from the merger between SapuraCrest and
Kencana that allowed the Seadrill deal to happen.
“You have to be
of a certain size before something like this gets presented to you. The
merger allowed us to get onto a lot of people's radar to see where the
big deals come in,” says executive vice chairman Datuk Mokhzani Mahathir.
Seadrill is unique because of the relationship SapuraCrest has had,
both on the personal and working level that has been established over
many years. That's why this deal was made possible.”
“In terms of
value, it meets all of the requirements the board has asked us to look
at, such as in terms of value, synergy, growth, control and
management... everything. So we are quite comfortable with it.”
the deal will see SapuraKencana have an order book of RM18.5bil and its
cashflow should improve as a result of the contracts the rigs have
secured. It's ability to cross-sell its services will improve and
Shahril says multiple rigs, newbuilds and the company's track record
will help in access to new markets and opportunities.
says the improved financials will help but the group has already planned
and allocated on the capital requirements for the four segments it
have almost fully invested for the next 5 years in offshore
construction services with the 5 new vessels coming up. That's going to
grow,” he says.
The transaction with Seadrill settles the
expansion in the rigs segment and the company has already calculated
just how much it needs to take advantage of the marginal oilfield
business. Capex for the modernisation of its fabrication business has
also been settled.
Both Shahril and Mokhzani feel securing more
marginal oilfields will depend on how the company bids and the larger
tender rigs business will only help in its proposition to Petronas for
more RSC jobs.
“The more integrated services you have, the better
chance you will have in order to quickly deploy the development of
these marginal oilfields,” says Shahril.
Although the group's
gearing will rise, Shahril says that's momentarily and will rapidly
climb down after 2 years. “Any acquisition will have borrowings and the
borrowings will be depleted over time as we payback. We are comfortable
with the gearing and its in line with the growth companies in this
sector anyway. ”
Shahril says allocating more cash for dividends
as cashflow improves will be balanced by the needs of the business
versus reward for shareholders.
“Once the debt levels goes down
in 2 years, then we will start increasing our dividend payments,” he
says, adding that the value of the company to shareholders will be
either captured in dividends or in the value of the shares.
If there is one risk from the transaction with Seadrill, it is the execution of the business.
risk is always there. When you do business in the oil and gas,
execution risk is everything. But we have the asset and the people to
deploy and execute projects and in that sense, the risk is minimal for
us anyway,” says Mokhzani.
“I don't think Seadrill would have
sold this to anyone else because they know we can take care of this
business for them. I think that is also why John Fredriksen has agreed
to join the board because he is not going to let go of this business,
this asset to anybody and he is comfortable with the people he is
dealing with now.”
Fredriksen on board
acquisition of the tender rigs from Seadrill will see Fredriksen join
the board of SapuraKencana, a move that both Shahril and Mokhzani feel
will add value to the company given his experience, contacts and
knowledge of the oil and gas industry.
But is there also a risk
in Fredriksen and Seadrill increasing its stake in SapuraKencana from 6%
to 13% from this deal given his previous record of trimming down
Seadrill's shareholding in SapuraCrest?
“I don't see that, not with him coming on the board,” says Shahril.
last time he sold he had invested in the company when it was worth 49
sen and then the value of the shares grew tremendously. He had a
US$450mil exposure in a company he had no control over. By him coming
onto the board, he can have influence as opposed to before it was just
an investment. So he liquidated half,” says Shahril, who says Fredriksen
liquidated the shares in the past and re-invested it with SapuraKencana
Shahril also doesn't think Fredriksen on board will lead to a clash of personalities and influence.