MARC has affirmed the ratings of A+ID and MARC-1ID/A+ID assigned to Bayu Padu Sdn Bhd’s (wholly-owned by SapuraCrest Petroleum Bhd) RM500 million Istisna’ Serial Bonds (“Istisna Bonds”) and RM100 million Murabahah Commercial Papers/ Medium-Term Notes (“MCP/MMTNs”) facilities, which reflect: positive outlook of the oil and gas (“O&G”) industry, especially in the upstream segment; expected improvements in financial performance resulting from substantial contracts in hand and contracts bid; and, further forays by SapuraCrest Petroleum Bhd (“SapuraCrest”) into the upstream activities via international expansion and investments in deepwater capabilities.

Moderating the ratings, however, are factors encompassing: the increasing debt leverage of SapuraCrest group; increasing receivables; the high volatility and tight margins of the group’s pipeline installation activities, and; SapuraCrest’s profitability being highly dependant on its ability to maintain sizeable contracts in hand.

Bayu Padu Sdn Bhd is a special purpose vehicle (“SPV”) incorporated to facilitate the Islamic financing transactions involving the issuance of the Istisna’ Bonds and MCP/MMTNs, where proceeds are intended for utilization by the SapuraCrest group of companies.

SapuraCrest is one of the largest Malaysian-owned upstream-based integrated service providers for the O&G multinationals. Demand for offshore oilfield services is expected to increase in tandem with the active offshore O&G exploration, development and production activities in the Malaysian waters. This augurs well for SapuraCrest’s various operating units which provide integrated services from offshore drilling, installation of pipelines and facilities (“IPF”), marine services to operations and maintenance. The focus on the development stage of O&G field projects yields more stability in revenue as compared to the exploration stage. To strengthen its competitive position, the group plans to acquire deepwater assets and is in a joint venture to build a dynamic positioning heavy-lift derrick and pipe laying combination vessel to provide greater flexibility in bidding for IPF projects and better cost control.

For the FYE January 2006, the SapuraCrest group’s revenue increased by 74% to RM1.8 billion from RM1.0 billion in the previous year. The higher revenue was mainly due to higher revenue from the IPF and drilling divisions while lower revenue was registered by the marine services division. SapuraCrest’s profit before tax meanwhile increased to RM109.8 million in FYE2006 from RM72.1 million in the FYE2005. Historically, even though the IPF segment has generated the highest in terms of revenue contribution to the group, its margins were very low while its earnings were quite volatile due to the mismatch in fixed contract value against the variable daily contract costs. One of the major variable costs was the leasing costs of vessels. For the first quarter ended April 2006, SapuraCrest group’s pre-tax profit registered at RM16.2 million against total revenue of RM380.2 million, which is a 45.0% decline in profitability as compared to the previous corresponding period. The losses suffered by the group’s IPF division were moderated by the group’s drilling and marine services divisions, resulting in lower operating profit margins for the group.

Debt-to-equity ratios increased in FYE2004 due to higher debt to finance expansion and acquisition, accumulated losses and the inclusion of SapuraCrest’s marine unit Sapura Energy Sdn Bhd’s (“SESB”) RM140 million BaIDs after a rationalization exercise of the group. Although a rights issue exercise in February 2004 helped to lower the debt leverage ratio to 1.36 times in FYE2005, the first drawdown of RM250 million of the Istisna’ Bonds on 26 August 2005 resulted in the group’s leverage ratio increasing to 1.91x in FYE2006.