Further to our  announcement dated 31 May 2023 and pursuant to Paragraph 9.19(37) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, the Board of Directors of the Sapura Energy Berhad (“SEB” or “Company”) wishes to inform that the Company’s External Auditor, Messrs. Ernst & Young PLT had expressed their unqualified opinion with material uncertainty related to going concern in respect of the Audited Financial Statements of the Company for the financial year ended 31 January 2023 (“AFS 2023”).

EXTRACT OF THE AUDIT REPORT

“Material Uncertainty Related to Going Concern

We draw attention to Note 2.1 to the financial statements, which indicates that the Group and the Company reported a net loss of RM3,175.5 million and RM3,669.7 million respectively for the year ended 31 January 2023, and as of that date, the Group’s and the Company’s current liabilities exceeded their current assets by RM12,662.9 million and RM1,749.5 million respectively, and that the Group is facing severe liquidity constraints. The Company and 22 of its subsidiaries (“the Applicants”) have obtained Restraining Orders under Section 368 of the Companies Act 2016 in Malaysia (“the Act”) which will expire on 11 June 2023 respectively and is in the process of undertaking schemes of arrangement (“SOA”) and compromise under Section 366 of the Act.

These events or conditions, along with other matters as set forth in Note 2.1 to the financial statements, indicate the existence of material uncertainties that may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern. Nevertheless, the financial statements of the Group and of the Company have been prepared on a going concern basis, the validity of which is highly dependent on obtaining extensions of the Restraining Orders; the successful and timely implementation of the proposed SOA which requires that the Applicants to secure approvals from at least 75% of the scheme creditors in the court convened meetings; and the financial assistance from a white knight.

Should the going concern basis for the preparation of the financial statement be no longer appropriate, adjustments would have to be made in the financial statements relating to the amounts and classification of the assets and liabilities. No such adjustments have been made to these financial statements.

Our opinion is not qualified in respect of this matter.”

KEY AUDIT MATTERS DISCLOSED IN THE EXTERNAL AUDIT REPORT

The following are the Key Audit Matters as extracted from the Independent Auditors’ Report of AFS 2023:

“(a)          Impairment assessment of goodwill on consolidation and property, plant and equipment (“PPE”)

(Refer to Notes 2.33(b)(i), 13 and 14 to the financial statements)

As at 31January 2023, the carrying values of the Group’s goodwill and property, plant and equipment (“PPE”) amounted to RM239.1 million and RM5,079.5 million respectively, which collectively represents 42% of the Group’s total assets.

In accordance with MFRS 136: Impairment of Assets, the Group is required to perform annual impairment test of goodwill and whenever there is an indication that the PPE may be impaired by comparing the carrying amount with its recoverable amount. Recoverable amount is defined as the higher of fair value less costs of disposal (“FVLCD”) and value-in-use (“VIU”).

 The Group has allocated its goodwill to the Engineering & Construction (“E&C”) and Drilling business segments. In relation to PPE (including vessels), management has identified them to be tested for impairment in view of the Group’s loss-making position, continued challenges and volatility within the oil and gas industry.

Due to the significance of the carrying values of goodwill and PPE, and the complexity and subjectivity involved in the impairment assessment, we considered this as an area of audit focus.

In addressing the matters above, we have performed amongst others the following audit procedures:

• For the recoverable amounts of cash generating units (“CGUs”) or groups of CGUs determined using VIU, we have:

        (i) Obtained an understanding of the relevant processes and internal controls over estimating the recoverable amount of the CGUs or groups of CGUs.

       (ii) Evaluated the key assumptions as disclosed in Note 13 and 14 to the financial statements used by management in the cash flow projections on whether they are reasonable by  comparing to past actual outcomes and by corroborating with industry analysts’ views, management’s plans, existing contracts and upcoming bidding opportunities, where     

applicable.

     (iii) Evaluated the discount rates, terminal growth rates (for goodwill) and the methodology used in deriving the present value of the cash flows, with the support of our internal valuation specialists.

    (iv) For CGUs or groups of CGUs to which goodwill and PPE are allocated, we have performed sensitivity analysis on the key inputs to understand the impact that alternative assumptions would have had on the recoverable amounts.

   (v) Assessed the adequacy of the disclosures made in the financial statements.

• For the recoverable amounts of the vessels determined using FVLCD, we have:

(i) Considered the independence, reputation and expertise of the independent valuers.

(ii) Obtained an understanding of the methodology adopted by the independent valuers in estimating the fair value of vessels and assessed whether such methodology is consistent with those used in the industry.

(iii) Discussed with the independent valuers to obtain an understanding of the assumptions and related data used as input to the valuation models.

(b)           Revenue from construction contracts recognised on percentage of completion method

(Refer to Notes 2.22(i)(a) and 3 to the financial statements)

Revenue from construction contracts contributed approximately 41% of the Group’s total revenue for the year ended 31 January 2023. To measure progress over time, the Group applied the input method which is based on the percentage-of-completion (“POC”). POC is determined by the proportion of cost incurred for work performed to date over the estimated total contract cost. The use of POC requires management to exercise significant judgement in estimating the costs to complete. Accordingly, we considered this as an area of audit focus.

In estimating the costs to complete, management considered the completeness and accuracy of its costs estimation including its obligations in respect of contract variations, claims and cost contingencies. It also involved appropriately identifying, estimating and providing for contracts with foreseeable losses. The costs to complete can vary with market conditions and unforeseen events during the contract period.

In addressing the matter above, we have performed amongst others the following audit procedures:

(i) Obtained an understanding of the processes and internal controls over the accuracy and timing of revenue and profit recognised in the financial statements, including the process and controls performed by management to estimate the total contract cost, profit margin and POC of the projects.

(ii) Discussed with management on the basis for estimating total contract cost of significant projects.

(iii) Evaluated the assumptions applied in determining the estimated total contract cost of significant projects, by comparing the estimated costs to complete with documentary evidence such as original signed contracts and variation orders. We also considered the historical accuracy of management’s budgets.

(iv) Assessed the adequacy of provision for foreseeable losses made for ongoing contracts, where applicable.

(v) Assessed the reasonableness of the project’s estimated profit margin, by comparing it to management’s initial budget and past actual outcomes.

(vi) Agreed the contract sum used in management’s calculations of revenue to the original contracts and approved variation orders where applicable, on a sampling basis.

(vii) Tested management’s calculations of POC and revenue.”

STEPS TAKEN OR PROPOSE TO BE TAKEN TO ADDRESS THE KEY AUDIT MATTERS THAT RELATE TO THE MATERIAL UNCERTAINTY TO GOING CONCERN AND TIMELINE

Reference is made to our announcements dated 31 May 2022 and 1 June 2022.

(1) SEB and its subsidiaries (“SEB Group”) is faced with a severe liquidity constraint mainly due to its financial losses, lack of access to working capital and bank guarantee facilities and an unsustainable level of debts, the combined effect of which is threatening SEB Group and the Company as a going concern.

(2) A Board Restructuring Taskforce was established on 28 September 2021 to provide oversight and steer on the proposed regularisation plan to improve the financial condition of SEB Group.

(3) Reference is made to our announcement dated 8 March 2023 where we stated that on 3 March 2023, in view of the expiry of the earlier order granted by the High Court of Malaya at Kuala Lumpur (the "Court”), the Company and 22 of its wholly owned subsidiaries (the “Applicants”) filed a fresh application under Sections 366 and 368 of the Companies Act 2016 (the “Act”). On 8 March 2023, the following orders were granted by the Court which took effect from 11 March 2023 to 10 June 2023:

a. The Order under Section 366(1) of the Act allows each Applicant to summon meetings with various classes of its creditors (collectively, “Creditors”) and to consider and approve a Proposed Scheme of Arrangement (“PSA”) between the Applicants and its Creditors to settle the Creditors’ claims.

b. The Applicants were granted a restraining order pursuant to Section 368(1) of the Act (the “Restraining Order”) to restrain and stay all proceedings, further proceedings, intended future proceedings in any action or proceeding against any Applicant and or its respective assets. The Restraining Order is to facilitate negotiations between each Applicant and its Creditors and finalise the terms of its PSA without the disruption or threatened by ongoing legal proceedings in the interim.

c. The Restraining Order will not apply to certain financial institutions (collectively, the “MCF Financiers”) who have provided multicurrency financing facilities to Sapura TMC Sdn. Bhd. on the basis that the MCF Financiers are bound by a Corporate Debt Restructuring Committee (“CDRC”) standstill. The Company and its relevant subsidiaries’ Proof of Debt exercise with its trade creditors in connection with the PSA is on track and nearing completion. The exercise involves RM1.5 billion claims submitted by approximately 2,300 trade creditors.

Further to our announcement on 6 June 2023, the Court has granted the Applicants an extension of 9 months from 11 June 2023 to 10 March 2024 for the Orders.

(4) Reference is made to our announcement on 5 September 2022, where we stated that on 1 September 2022, the CDRC approved the Company’s application for assistance to mediate in its debt restructuring negotiations with the MCF Financiers. Following the Company’s admission to the CDRC regime and pursuant to the CDRC Code of Conduct, the relevant financial institutions were required to observe an informal standstill and withhold all legal proceedings and/or any other recovery action initiated or intended against the Company and/or the Company’s subsidiaries. The Company has since submitted a draft Proposed Restructuring Scheme (“PRS”) and has participated in various meetings between the Company and the MCF Financiers mediated by CDRC.

On 28 February 2023, the Company received a formal notification dated 24 February 2023 from the CDRC stating that the CDRC Committee had decided to extend the standstill period for the Company and its relevant subsidiaries under the CDRC regime, up to 9 September 2023.

(5) Reference is made to our announcement on 5 September 2022, where we stated that on 15 February 2023, the Company received a formal letter from a white knight supporting the Company’s restructuring initiatives and Regularisation Plan. The support from a white knight will be in the form of an investment into the Company, subject to the following conditions:

(a) The amount and terms to be discussed and finalised by a white knight and the Company; and

(b) Agreement to the Schemes with the MCF Financiers.

(6) Financial, legal and other advisors have been appointed to develop, negotiate and implement a debt restructuring scheme to attain a sustainable level of debt for SEB Group. MIDF Amanah Investment Bank Berhad has been appointed as the Principal Advisor to facilitate the proposed regularisation plan pursuant to Paragraph 8.04(3) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad. Further to our announcement dated 13 June 2023, where we stated that on 12 June 2023 Bursa Malaysia Securities Berhad had granted an extension of 6 months up to 30 November 2023 for SEB to submit its regularisation plan to the relevant regulatory authorities.

(7) Restructuring Sapura Energy business through a Reset Plan to divest non-core businesses and assets, improve bidding and project delivery capabilities, continue to secure contracts with acceptable margins and cash flows, and implementing a robust financial framework to ensure financial discipline.

Premised on the above, the Board expects that with the extension on the Restraining Order granted on 6 June 2023 and with stand still arrangements with the MCF Financiers, in place, a mutually beneficial SOA is likely to be agreed with the scheme creditors by achieving majority support in the court convened meetings within the stipulated timeframe. This is premised on the basis that SEB Group will be able to offer higher recovery under the PSA compared to the recovery from individual Applicants under liquidation.

This announcement is dated 14 June 2023.