The rating for Sapura Energy Sdn Bhd’s (SESB) RM140 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) is reaffirmed at AID reflecting the bright outlook of the oil and gas (O&G) industry, especially in the upstream segment; SESB’s strength in the marine engineering business; and synergies arising from the business expansion of the SapuraCrest Petroleum Berhad (SapuraCrest) group of companies. The rating, however, is moderated by SESB’s high reliance on a strong order book, strong competition and the thin margins of the industry. The rating carries a Stable Outlook.

SESB’s main revenue generator continues to be the marine engineering division supported by a fleet of eight vessels. This business unit is principally involved in the provision of marine and engineering services such as vessel operations with provision of accommodation, work barges, work boats and diving support vessels, underwater inspection and maintenance, topside major maintenance, hook-up and commissioning, refitting and upgrading of existing platforms and modifications. Apart from marine engineering, SESB’s revenue is supplemented by its operations and maintenance division.

Whilst the bulk of SESB revenue is still derived from the local market, future earnings are expected to draw upon some contribution from the overseas markets. Locally, SESB will continue to tender for contracts from PETRONAS Carigali Sdn Bhd (PCSB) and foreign companies with local presence. To reduce reliance on local based contracts given the higher competition in the local market, SESB is gradually venturing into India, Indonesia, Vietnam and Thailand. Future growth strategies of the company are mainly to support its parent SapuraCrest’s objective to become a leading integrated O&G service provider in Malaysia as well as the region. SESB’s future strategies comprise 1) enhancing deepwater capabilities, 2) regional expansion, 3) improving margins.

SESB, which had recorded strong revenue growth since 2001, has recorded a decline in revenue for its FYE2006 to RM244.4 million compared with RM340.1 million in FYE2005. The decline in revenue is partly due to the conclusion of a contract under Sarawak Shell and PCSB in January 2005 which had contributed strongly to revenue in FYE2005. Nevertheless, with total contracts in hand of approximately RM800 million coupled with the group’s ability to secure new contracts, SESB’s cashflow position is expected to be manageable in the near term. At the same time there were also improvements in interest coverage and debt coverage, as a result of improved operating cash flows and declines in SESB’s long term debt position.

The debt-to-equity ratio was 1.41 times in FYE2006 (FYE2005: 1.89x), which is well below the financial covenant level of 4 times, and is also well in line with its competitors in the industry. The debt leverage is expected to improve further with the repayment of the BaIDS of RM25 million which is scheduled for December 2006.