Rig incident renews concerns over SembMarine's backlog

SINGAPORE - Fresh concerns have emerged over the deliverables of Sembcorp Marine's outstanding rig building backlog after a Feb 28 yard incident caused damage to the Noble Lloyd Noble jack-up rig being built under a US$592 million contract New York-listed Noble Corporation signed with the yard group.

SembMarine said in a statement to The Business Times that the damage to the rig is believed to be minor and the rig's delivery in the second quarter of 2016 will not be affected.

The incident has, however, dealt a further blow not only to the market confidence over the net realisable value of SembMarine's order backlog, but also its rig-building track record.

RHB Bank analyst Lee Yue Jer said SembMarine will have to record provisions for worker compensation, damage repair and potential delivery delay penalties. The financial damages can be mitigated to some extent by insurance, which will cover the bulk of the additional cost required for the rig repair, a DBS Vickers note suggested, although the brokerage house views negotiation on the potential delay penalties - the size of which is subject to the extent of the delay and the findings of ongoing investigation into the incident - as unfavourable to the yard group under tough market conditions.

RHB's Mr Lee recalled a December 2012 jack-up rig incident involving the same yard - SembMarine's Tanjong Kling, then known as Jurong Shipyard - and the same customer - Noble Corp. The December 2012 incident involving the tilting of jack-up rig Noble Regina Allen affected 89 workers who were admitted for medical review. However, the expectations are that the delivery of Noble Lloyd Noble may not be as badly impacted by the Feb 28 incident as that for Regina Allen and other jack-up rigs then on Jurong Shipyard's order book. The Ministry of Manpower has also reported three casualties - all foreign yard workers with minor injuries - from the Feb 28 incident.

One informed source said the cause of the Feb 28 incident - which Noble Corp attributed to the collapse of a shipyard crane boom - has no implications on the structural integrity of Noble Lloyd Noble. SembMarine is working with Noble Corp to assess the damage to Noble Lloyd Noble, which includes among potentially others, the damage to a crane on the rig that has come into contact with the errant shipyard crane, statements from the two parties suggested.

The yard group expressed confidence that the damage can be redressed ahead of the jack-up's target delivery in the second quarter of 2016, which has already been deferred from the original contracted date in Q1 2015. Whether the deferment from Q1 2015 was agreed between Noble and SembMarine cannot be ascertained at press time, although the rig in question is contracted for a drilling campaign in Statoil-operated Mariner development off the UK, which had been delayed by the oil company until autumn 2016.

The deferment of the rig delivery to Q2 2016 could have suited Noble Corp, although on further delays, the rig owner-operator could exercise the right to cancel the contract for Noble Lloyd Noble with SembMarine if it carries a "standard terminate if late clause", Ian Craven of Icarus Consultants told The Business Times. He views the cancellation of the contract as highly unlikely given the four-year Statoil contract will be a major boost to the rig owner-operator.

The wild card, however, is Statoil's response to any delay in the rig delivery beyond Q2 2016. If the oil company were to use the rig delivery delay as an excuse to cancel or postpone Mariner drilling programme, Noble Corp is likely to terminate the contract with SembMarine for Noble Lloyd Noble jack-up, Mr Craven said.

Shares in Sembcorp Marine closed at S$1.58 on Wednesday.

This article was first published on March 3, 2016.
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