MARC AFFIRMS ITS AA-ID RATINGS ON BAYU PADU SDN BHD'S RM500 MILLION ISTISNA’ SERIAL BONDS

Mar 8, 2013 -

MARC has affirmed the rating of AA-ID on Bayu Padu Sdn Bhd’s (Bayu Padu) RM500 million Istisna’ Serial Bonds (Istisna' Serial Bonds) with a stable outlook. The rating action affects RM190 million of outstanding Istisna' Serial Bonds.

Bayu Padu, formerly special purpose funding entity of SapuraCrest Petroleum Bhd (SapuraCrest), became a wholly-owned subsidiary of SapuraKencana Petroleum Berhad (SapuraKencana, formerly known as Sapura-Kencana Petroleum Berhad), the new entity which was formed to facilitate the merger between SapuraCrest and Kencana Petroleum Bhd (Kencana). Following the May 15, 2012 merger between SapuraCrest and Kencana, SapuraCrest’s liabilities and the corporate guarantee that was issued for this rated issuance have been assumed by SapuraKencana. MARC’s rating on the bonds is now based on SapuraKencana’s consolidated credit profile due to Bayu Padu’s dependence on the merged entity to service the bonds.

The affirmed rating is underpinned by merged entity SapuraKencana’s significant operating scale with leading market positions in the installation of pipelines and facilities (IPF) and engineering, procurement, construction and commissioning (EPCC) oilfield service segments, its current consolidated and prospective profitability and good financial flexibility. MARC also notes that SapuraKencana has continued to enhance growth through acquisitions that are accretive to earnings. These positives are tempered by competitive industry conditions and the cyclical nature of exploration and production (E&P) spending by oil and gas (O&G) sector, SapuraKencana’s increased debt leverage and continuing high capital expenditures which impede free cash flow generation. The stable rating outlook is underpinned by the continued good operating momentum provided by SapuraKencana’s large order book of RM13.3 billion as at October 31, 2012. Also, MARC expects SapuraKencana to preserve its financial flexibility through an early refinancing its existing debt to improve its debt amortisation schedule.

Following the merger between SapuraCrest and Kencana, SapuraKencana became a global player in engineering, procurement, construction, installation and commissioning (EPCIC). SapuraKencana’s increased size and scale as well as broader scope of operations has allowed management to pursue larger customers and more sizeable contractual relationships. SapuraKencana’s competitive positioning in the global EPCIC market derives from its integrated EPCIC capabilities and its execution track record. SapuraKencana is also a leading player in offshore installation and hook-up commissioning segment of O&G services, with established partnerships with international partners.

SapuraKencana’s offshore construction and subsea services (OCSS) division, which includes IPF services, is the group’s main revenue and earnings generator; the division contributed 58% and 55% of consolidated revenue and pre-tax profit respectively for the nine months ended October 31, 2012 (9MFY2013), and also accounts for 70% of the group’s total outstanding order book. SapuraKencana’s fabrication, hook-up commissioning and offshore support vessel (Fab & HUC) division, which includes EPCC services, meanwhile, is the second largest contributor to its consolidated revenue and earnings. SapuraKencana’s operating momentum continues to be bolstered by its improved competitive positioning, large order book and continued growth in its specialised assets base of drilling rigs and offshore vessels.

SapuraKencana proposed to acquire 18 tender rigs from Norway’s Seadrill Limited (Seadrill) for an enterprise value of US$2.9 billion and to combine Seadrill’s tender rig business with its own. The acquisition of Seadrill’s tender rigs, which is expected to close in the second quarter this year, would further increase SapuraKencana’s scale in the tender rig business, making it the world’s largest operator of tender rigs. The 15 operating rigs to be acquired and the three newbuilds are currently all contracted under long-term fixed price contracts with oil majors.

For 9MFY2013, SapuraKencana posted revenue of RM5.0 billion and a pre-tax profit of RM621.9 million. The post-merger entity’s operating profitability and results are broadly within expectations. However, MARC notes increased debt tolerance at SapuraKencana as compared to pre-merger gearing levels of the pre-merger entities. SapuraKencana’s debt-to-equity ratio was 0.90 times (x) as at end-October 2012. MARC observed a fairly pronounced increase in interest expense and a decrease in EBITDA and cash flow to debt and interest coverages for the nine month period compared to SapuraCrest’s pre-merger credit protection measures. Apart from incremental debt, MARC observes that merger between SapuraCrest and Kencana has also generated a considerable amount of goodwill which weigh on SapuraKencana’s tangible leverage. In the immediate term, MARC expects SapuraKencana’s borrowings to increase further as a result of its pending acquisition of Seadrill’s tender rigs and its large capital expenditure programme. Notwithstanding the good earnings and cash flow generating capacity of the assets to be acquired, the incremental debt used to finance the asset acquisitions can increase SapuraKencana’s susceptibility to a deterioration in its operating environment.

MARC expects SapuraKencana’s free cash flow generation to remain constrained over the next two years due to growth-related capital expenditures, as reflected in its capital commitments of RM2.8 billion as at end-October 2012. This will put the group’s cash flow coverage metrics temporarily at levels below applicable rating category medians. However, MARC expects that in the intermediate term, SapuraKencana’s free cash flow will be largely used for permanent debt reduction. Meanwhile, SapuraKencana’s liquidity profile benefits from its good access to external sources of liquidity, evidenced by its RM1.1 billion holdings of cash and cash equivalents which was largely supported by new borrowings. This is consistent with MARC’s belief that periods of high leverage need to be balanced against ample access to external sources of liquidity.

MARC will continue to monitor the developments with respect to the pending acquisition of Seadrill and SapuraKencana’s planned early refinancing of the bonds and take rating actions as appropriate.

Contacts:

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.