MARC has upgraded the long-term Islamic debt rating of Bayu Padu Sdn Bhd (Bayu Padu) to AA-ID from A+ID and affirmed the company's short-term Islamic debt rating at MARC-1ID. The outlook for the ratings is stable. The rating action affects RM250 million of outstanding Istisna' Serial Bonds (Istisna' Bonds) maturing from 2012 through 2015, and RM100 million Murabahah CPs issued under Bayu Padu's Murabahah Commercial Papers/Medium Term Notes facility which expires in November 2012.

Bayu Padu is a funding vehicle of SapuraCrest Petroleum Bhd (SapuraCrest) which was set up to raise financing on behalf of SapuraCrest, a non-operating holding company. The SapuraCrest Group provides oilfield services to the oil and gas industry through four business segments: installation of pipelines and facilities (IPF), offshore drilling, marine services and operations and maintenance services (O&M).

The rating upgrade recognises the improvement in SapuraCrest's consolidated credit profile, in particular group liquidity metrics and adjusted debt leverage. The improvement in the group's credit profile has been driven by a continuous increase in its market share of the IPF services, improved geographical diversification and relatively stable consolidated operating margins. Going forward, MARC expects the group's earnings momentum to be supported by its outstanding order book which offers earnings visibility until 2012.

Constraining the ratings are the fairly significant amount of debt senior to Sapura Crest's and Bayu Padu's obligations, in particular the direct debt of its operating subsidiaries and jointly-controlled entities in addition to the large amounts due from subsidiaries on the parent's balance sheet. Although the amounts due from subsidiaries are mostly repayable on demand, MARC believes that the operational liquidity needs of these entities remain substantial, as implied by the modest liquidity maintained at holding company level and recent subsidiary dividend payout levels. Meanwhile, outstanding debt raised through Bayu Padu accounts for a significant 56% of the group's total on-balance sheet borrowings as of October 31, 2010.

SapuraCrest Group has a sizable order book of outstanding works valued at RM9.0 billion as at July 2010. The IPF division has enhanced its competitive standing through the acquisition of strategic assets as reflected in its strong order book of RM7.3 billion as of July 2010 and contract wins in the region. Meanwhile, the group's offshore drilling division secured two new contracts valued at a total of RM413.4 million in September 2010. These two key business segments of SapuraCrest Group are expected to provide revenue and earnings visibility through 2012.

The group posted profit attributable to shareholders of RM54.8 million for the third quarter ended October 31, 2010, up marginally from RM53.4 million for the prior year’s corresponding period. A weaker US dollar had impacted the drilling division’s earnings contribution while the marine services division posted losses for the third consecutive quarter of FY2011. This was, however, mitigated by the robust performance of the IPF division. For the nine months to October 2010 (9M2011), SapuraCrest continued to exhibit stable operating performance, recording a pre-tax profit of RM311.5 million and operating profit margin of 10.1%.  Cash flow from operations (CFO) moderated to RM207.5 million in 9M2011 (full year FY2010: RM849.7 million) as a result of an increase in amounts due from ongoing IPF contracts. The group's consolidated cash and bank balances remained substantial at RM691.1 million as of October 31, 2010, of which almost two-thirds are only available to certain companies within the group.

Between January and October 2010, the group had pared down its borrowings by RM88.1 million to RM614.8 million from RM702.9 million. As a result, SapuraCrest's debt-to-equity (DE) ratio as at October 2010 improved to 0.42 times, compared to 0.48 times as at January 2010. Adjusting for borrowings at jointly-controlled entities guaranteed by the company in proportion to its equity interest, the group's DE ratio as at October 2010 stood at 0.73 times (January 2010: 0.85 times). MARC notes that SapuraCrest's adjusted debt leverage is lower than most comparable players in the oilfield services industry.

The stable outlook assumes continued positive free cash flow generation at the consolidated level and sustained profitability which would remain key drivers of SapuraCrest's and Bayu Padu's debt servicing capacity and financial flexibility.

Contacts:
Eric Chua, 03-2082 2245/ cheekiong@marc.com.my;
Taufiq Kamal, 03-2082 2251/ taufiq@marc.com.my;
Anandakumar Jegarasasingam, 03-2082 2250/ kumar@marc.com.my.