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| SapuraKencana moves to next level Posted: 09 Nov 2012 02:31 PM PST
Jagdev Singh Sidhu, The Star 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.
"Someone 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. "We 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. Amresearch 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. "We 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. One 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. Shahril disputes that assumption, saying the acquisition re-inforces the vision of the company to become a fully integrated oil and gas service company. "In 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," he says. What it means for SapuraKencana Apart 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. "But 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." Completion 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. Shahril says the improved financials will help but the group has already planned and allocated on the capital requirements for the four segments it "We 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. "Execution 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 The 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. "The 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 in Brazil. Shahril also doesn't think Fredriksen on board will lead to a clash of personalities and influence. "Good solutions come out of constructive conflicts. Differences in ideas is not a bad thing. He identified with our direction and now he is endorsing it by coming on board. He will not have taken that step if he did not see the value in this company," he says.
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| Labis is where MCA’s haunted past may cause a GE13 disaster Posted: 09 Nov 2012 02:02 PM PST
The next general election is expected to be the closest fight to form the new Malaysian government. And several seats across the nation are likely to be heated battles with the slimmest of majorities. The Malaysian Insider takes a look at some of these hot seats in what will be an intense election for control of Malaysia. Clara Chooi, The Malaysian Insider Labis feels like an island, secluded and quiet with nary a sound from the hustle and bustle one would expect to see in a constituency held for six terms by two prominent MCA stars — former president Tun Dr Ling Liong Sik and current chief Datuk Seri Dr Chua Soi Lek. Like its name, which some historians believe was derived from "labi-labi" or river terrapins, the daily pace here is almost tortoise-like; slow and sleepy. Most of its residents work in rubber estates or oil palm plantations, while the others are petty traders, government servants or merely passing through to the busier parts of Johor. Here, one can neither hear the buzz of industries nor see white plumes of smoke polluting the skies as the nearest factory is miles and miles away. After 7pm, buses no longer ply the town's roads — rarely do passengers get off at this stop, anyway. "Labis becomes a remote area after 7pm... a dead sea. The irony of it all... Ling Liong Sik was the transport minister when he held the Labis seat," local resident S. Madhavan remarked recently when met in the evening of a characteristically quiet Monday in this sleepy hollow.  Dr Ling held the Labis seat from 1986 to 2003. "MCA... they are all the same, aren't they? They have big-shot government posts and they forget who gave them the opportunity," he told this news portal. "There is so much anger with the MCA... sometimes, they are so angry that people cannot even remember why they are angry. But they know for certain that they want a change," said Tan Chin Guan, a local DAP leader. "The Labis people get slaughtered in so many ways... but many do not even know, they are so innocent. "But today, some have leapt off the fence... they say they want to try something new," former Education Ministry officer G. Krishnabagwan said. Madhavan, Tey, Tan and Krishnabagwan, who each spoke at separate interviews recently, are among the estimated 22,600 non-Malay voters who make up a sizeable 62 per cent of the 36,000-strong electorate in Labis. Their voices echo a growing resentment among the non-Malays here against the MCA and may well be the death knell for the party, which has been struggling since its dismal performance in Election 2008 to recapture at least some of its lost Chinese support. But during the interviews, there was one resounding sentiment that could not be avoided — Labis' non-Malay voters have largely gone pro-opposition. At every step of the way, those interviewed were too quick to blame the MCA and Barisan Nasional (BN) for every hardship they face — from the common flooding of their neighbourhoods and the lack of street lamps to the lack of job opportunities and affordable housing. Tan, a 60-year-old who spoke in halting English, lent voice to a perceived sentiment when he said that some voters feel so strongly against the MCA that they have even forgotten their reasons. "But it makes sense... when you see the same faces everyday, read about the same names, and your life remains the same, you tend to want something different. It's always been MCA's... Tun Ling for so many years, then Soi Lek... now Tee Yong," he said, the last referring to the incumbent MP, a son of Dr Chua, the town's previous parliamentary representative. "You begin to think to yourself, let's try something new. What's the harm in that? We could always change the government again," he said, during the interview at his home in the Labis town centre here.  Dr Chua won the Labis seat in the 2004 general election, but stepped down in late 2007 after a sex scandal. He was succeeded by Dr Chua in the 2004 polls, after which the latter was appointed health minister in the Abdullah administration. The seat is held today by Datuk Chua Tee Yong, son of Dr Chua, who took his father's place after a sex scandal in late 2007 forced the veteran politician to exit politics briefly, just months before the 2008 election, no less. Tee Yong is said to possess the same boldness and bravado exhibited by his outspoken father. Taking into account his relative youth — he is now 35 years — and his reputation as the man who accused the Selangor Pakatan Rakyat (PR) government of a RM1 billion Talam Corp accounting scandal, Chua junior is said to be a popular face among his Labis constituents. But youth and passion may not be enough to win the game for the MCA in Labis, which is fast becoming the stage for a political battle that could very well spell the party's demise in its southern fort. It is not Tee Yong that the non-Malay voters are against — it is the flag that he flies and memories of the years of alleged neglect that it carries with it. "The present MCA president, he is doing better. His son comes here often, we see him a lot. "Last time, Dr Ling never came at all... I think his reputation itself has ruined things for MCA," said one drinks stall owner, who only identified himself as Mr Tan. "Everyone called Dr Ling a yes-man. A weak man. The Chinese here, when we speak of MCA, we equate it to weakness. "It is not a deep-seated hatred. But for sure, the non-Malays are for the opposition, for the DAP," Mr Tan said. The father of two agreed that Labis town has seen no development over the past few decades, pointing out that its population is ageing and disappearing quickly to seek better opportunities elsewhere.
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