RAM Ratings reaffirms AA3 rating of SapuraKencana’s sukuk

Published on 16 April 2013

RAM Ratings has reaffirmed the AA3 rating of SapuraKencana Petroleum Berhad’s (“SapuraKencana” or “the Group”) RM700 million Sukuk Mudharabah Programme (2011/2026) with a stable outlook. SapuraKencana is a provider of drilling services, engineering, procurement, construction, installation and commissioning (“EPCIC”) services, marine services, as well as operations and maintenance (“O&M”) services for the oil and gas (“O&G”) industry.

The rating reflects the Group’s strong position in the domestic and global oilfield services industries. SapuraKencana is the country’s largest provider of oil-field services and ranks among the top 10 world players by market capitalisation. “We opine that its integrated operations augur well for the Group in securing larger turnkey EPCIC projects, giving it greater control over project implementation and, by extension, protecting its profit margins,” says Kevin Lim, RAM’s Head of Consumer and Industrial Ratings.

SapuraKencana enjoys recurring income from its longer-term drilling contracts. Post acquisition of a fleet of tender rigs from Seadrill Limited (“Seadrill”), the Group is anticipated to derive about 50% of its yearly operating profit before depreciation, interest and tax from the hire of its drilling rigs, contracts for which have tenures of 1–5 years; notably, a few of its contracts run for 8/9 years. Over the medium term, O&G support service providers are expected to enjoy steady demand, largely driven by Petroliam Nasional Berhad’s (“PETRONAS”) committed upstream expenditures. In Malaysia, SapuraKencana and its local peers also benefit from favourable policies implemented by the Government and PETRONAS that are designed to promote and develop domestic O&G players.

That said, the Group’s balance sheet and cashflow protection metrics are modest relative to its current rating. Following the merger between SapuraCrest Petroleum Berhad and Kencana Petroleum Berhad (“Kencana”), the Group’s total debt increased to RM5.94 billion as at end-FY Jan 2013 (end-January 2012: RM1.41 billion). This includes Kencana’s borrowings, and new debt to fund the merger as well as to acquire new assets. SapuraKencana is also envisaged to take on approximately RM6 billion of additional debt to fund the acquisition of Seadrill’s rigs. As such, its borrowings could double to around RM12 billion, with its gearing ratio elevated to between 1.0 and 1.2 times over the next 2 years (FY Jan 2013: 0.88 times), before gradually tapering. Meanwhile, the Group’s funds from operations debt coverage ratio is expected to stay modest at around 0.14–0.18 times (FY Jan 2013: 0.16 times). We remain cautious in respect of the impact of further aggressive debt-funded expansions on SapuraKencana’s financial metrics.

The sukuk’s rating is also moderated by the Group’s sizeable capital expenditure and working capital requirements, as well as its exposure to execution and regulatory risks. Given that EPCIC work is contract driven, the Group has to constantly bid for new jobs to sustain its top line, albeit the portion of this contract-based income is smaller with more recurring income from its drilling business. As in any merger and acquisition, we opine that SapuraKencana could face further challenges vis-à-vis the integration of Seadrill’s tender rig business, more so with the acquisition of the business taking place less than a year after its merger exercise. Nevertheless, we note that the Group (via SapuraCrest) have worked together with Seadrill for over a decade.

Media contact

Evelyn Khoo

(603) 7628 1075

evelyn@ram.com.my