Rig-order cancellation sparks SembMarine sell calls

News that ship charterer Marco Polo Marine had terminated an order sparked a flurry of sell calls on Sembcorp Marine (SembMarine) from analysts yesterday, citing worries that other clients may follow in Marco Polo's footsteps.

Marco Polo terminated the US$214.3 million (S$305 million) jack-up rig contract with PPL Shipyard, a SembMarine unit, claiming cracks were found on all three legs of the vessel despite repair works done after the first round of tests.

It is also seeking a refund of the 10 per cent deposit - around US$21.4 million - it had paid.

But some analysts say the cancellation comes amid a prolonged industry downturn that had left Marco Polo without a charter for the rig. They noted that the contract was signed before oil prices collapsed in the second half of last year.

Marco Polo noted in its third-quarter earnings that weak oil prices and a cutback in exploration work have resulted in lower market daily charter rates for jack-up rigs.

News of the cancellation sent Marco Polo's shares down 7.6 per cent or 1.6 cents to 19.4 cents yesterday, while SembMarine shed 2.2 per cent or five cents to $2.20. SembMarine refuted Marco Polo's allegations yesterday, calling it a "repudiatory breach of the contract".

The rig builder said PPL had not received any notice of termination at the time that it learnt of the announcement. SembMarine will, on its end, terminate the contract and claim other amounts due. PPL will take "the necessary steps to enforce its rights".

Maybank Kim Eng has a sell call on SembMarine as the rig builder has stopped recognising revenue on five of the rigs it is building.

On Marco Polo, it said: "We understand that Marco Polo has not operated a rig before and has not secured any charter for this rig."

Taking delivery of the rig would require huge funding, which would further stress Marco Polo's balance sheet, Maybank Kim Eng added.

But a Marco Polo spokesman said: "Notwithstanding repair works carried out by PPL on cracks found on all three legs of the new rig after the first round of tests, more cracks were observed on all three legs of the new rig during the second round of tests.

"This issue is severe enough to cause the company grave concern.

"The company... would have been in the position to make payment when due. In addition, it had received in-principle understanding from a potential investor to co-own and co-operate on the new rig."

RHB Research Institute Singapore investment analyst Lee Yue Jer, who has a sell call on SembMarine, said he expects the firm to make a $35 million to $40 million profit reversal in the fourth quarter as the rig is almost complete.

DBS Group Research analyst Ho Pei Hwa expects SembMarine to reverse the $217 million in revenue and $21.7 million in profit recognised for the Marco Polo contract in the fourth quarter.

Impairment losses may be required if the resale price is estimated to have fallen by more than 25 per cent of the contract value, she added.

This article was first published on November 19, 2015.
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