MARC has reaffirmed the long term rating of Sapura Energy Sdn Bhd’s (“SESB” or “the Group”) RM140 million Al Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) at AID. The rating carries a stable outlook. The reaffirmed rating reflects SESB’s moderate business profile as an oil and gas service provider with sustained operating track record evidenced by its ability to renew/obtain new contracts from its major customers. Although revenue has been on an overall uptrend since 2003, SESB’s financial metrics have been somewhat tempered by fluctuating profitability and tight cash flow position as a result of stiff competition from other players with a larger asset base.

SESB is a wholly-owned subsidiary of SapuraCrest Petroleum Berhad, an integrated oil and gas service provider. SESB’s two core business divisions comprise marine services and operations and maintenance (O&M), with the former accounting for more than 75% of the Group’s revenue for the past three years. Marine services provided by SESB include vessel operations, underwater and topside maintenance, hook-up and commissioning as well as refitting and modifying platforms. Its O&M division is involved in the provision of power turbine maintenance services, automation solutions and asset management services. SESB’s marine engineering contracts may be short or long term in nature. The Group maintains a mixture of variable and fixed pricing terms; whereby variable rates provide upside potential on daily charter rates while fixed rates inject some stability in its future revenue stream. Historically, SESB’s income was mainly derived locally while continued efforts to expand into regional markets saw its maiden contract from Oil and Natural Gas Corporation, India (ONGC) which was awarded in December 2005. To date, the ONGC is SESB’s largest overseas contract with a value of RM274 million.

SESB’s financial results improved significantly in FY2007, posting a pre-tax profit of RM13.7 million on the back of 56.6% revenue growth or RM382.5 million. The improvement in revenue was primarily attributable to the execution of the ONGC contract which contributed approximately 39% to total revenue. Meanwhile, SESB also recorded higher charter rates and increased utilisation of its vessels and remotely operated vehicles. As a result, its operating profit margin increased to 8.0% as compared to 5.1% in the previous year.

In the nine months period up to October 31, 2007 (3QFY08) SESB’s operating profit margin was significantly trimmed to 3.6%, on account of escalating manpower rates; vessel and equipment rental rates; and additional time required to implement the ONGC project. MARC is of the view that SESB’s liquidity position may be affected arising from the extended contract period. Nonetheless, the amount billed and collected up to 3QFY08 on the ONGC contract cumulatively exceeded 40% of the contract value. In addition, SESB has received RM20.0 million in respect of variation order claimed.

As at October 31, 2007, the Group’s debt leverage level increased marginally to 1.9 times (FY2007: 1.8 times). However, in December 2007, SESB’s debt leverage declined following the RM25 million redemption of the BaIDS.

The stable outlook on the rating reflects MARC’s expectations of near-term improvements in cash flow and debt servicing measures, and continuing strong support from SESB’s listed parent.