Sapura Energy has problems – big ones. Two events have ravaged Sapura’s share prices in June 2023 namely its classification as a PN17 company and its auditor saying that Sapura might not be around for longer if it doesn’t get its house in order.

If you are curious about what’s happening with Sapura Energy but don’t have the time to read about it, let me just give you 5 key takeaways that you could use.

#1 Sapura might not be able to repay its debt and creditors

Here is one key fact according to its auditor. Current liabilities exceeded current assets by RM12.7 billion. What does this mean to you as an ordinary person?

Imagine you have RM1,000 in the bank and you owe someone RM13,700. He wants it back now but you can only pay RM1,000. This is the situation Sapura finds itself in.

Current liabilities are what Sapura owes other people and have to repay in a year. Current assets are whatever cash (or assets that you can quickly convert into cash) that Sapura currently has.

Where can Sapura get the money? It could generate more revenue from its business but that’s not happening. It made a loss of RM3.2 billion in its latest fiscal year of 2023 and did not make a profit for the past 5 years.

It could borrow money from banks. However, if you are the bank, why would you borrow money from a company that has made so many losses?

Lastly, it could get an investment from a ‘white knight’ (a term used to describe an investor that pumps in money to save the company). There have been rumors that someone is willing to invest RM1.8 billion in the company. It will come with strings attached though.

#2 Sapura is working on restructuring its debt and the company

So what does Sapura do? It has to talk with the people they owe money to (creditors mainly). These creditors know that they probably can’t get much money out of Sapura considering their dire financial state.

Hence, Sapura is now negotiating with its creditors to restructure its debt. What it means is that it wants the creditors to extend the payment period or forgive some of the debt.

As with all negotiations regarding this, creditors sort of know that they can’t get what they were promised in the past and might relent on some of these terms to at least get some money back.

However, if push comes to shove, these creditors do have some legal rights to take possession of some of the company’s assets (which were probably promised as collateral) and sell them.

That is not desirable for Sapura as it needs these assets to continue operating its business and have a chance in making money to repay its obligations.

#3 Extensions have been granted for Sapura to get its house in order

Hence, Sapura obtained an extension from the High Court to get its house in order until 10 March 2024.

Before this, it managed to obtain a Convening and Restraining Order from 8 March 2023 to 11 June 2023, which forces its creditors to negotiate with them and prevent them from seizing their assets.

The progress on how Sapura is working to achieve profitability in the future will be key here for these discussions and negotiations. Its plan rests on these few key strategies:

1. Sell businesses and assets that are not important
2. Improve and increase bids for projects
3. Implement a robust financial discipline framework

To me, the first strategy for selling businesses and assets that are not important is the short-term solution. The other 2 are the longer-term but they lack clarity and are kind of lame.

It’s like telling other people that you will get better at your business. Of course, that is what you aim for. Whether you are successful is another story entirely.

#4 Sapura is now a PN17 company

With so many losses over the years, it is no surprise then Sapura was declared a PN17 company by Bursa Malaysia in June 2023.

A PN17 status is a near-death sentence by Bursa Malaysia as it tells the whole world that your company better buck up financially or risk being taken off the stock market.

Sapura will need to come up with a plan to tell Bursa how it plans to turn the company around by 30 November 2023.

If Sapura fails to do so or Bursa is not happy with the plan, it could be a bye-bye for Sapura from the stock market.

#5 Financial performance would have to improve significantly

Let’s take this opportunity to see what Sapura needs to do then. To me, there are a couple of things from the financial perspective that it needs to address.

Annual revenue needs to double from its current RM4.5 billion to a range of RM8 billion and RM9 billion for profits to be positive.

This is just my intuition. I am basing this on the past 5 years’ financial performance where its highest revenue of RM6.4 billion was achieved in 2020. Even then, it had a loss of RM4.6 billion.

Furthermore, it needs to increase the annual cash generated from its business by a whopping total of about RM750 million by making its business more efficient.

In 2023, Sapura generated a positive operating cash flow (meaning how much cash it received from its business operations) of RM119 million but it needed to pay for capital expenditures (investments into machines and other things needed to do business) of RM238 million and interest of RM623 million.

Conclusion

Sapura Energy has a long way to go in terms of returning to profitability based on the current facts. It first has to deal with its creditors and not default on its debts. Then, it has to ensure that it can generate more revenue in the future. For the moment, a lot of doubts surround the company and the PN17 status isn’t helping either.