SembMarine expects protracted O&M down-cycle

Sembcorp Marine is expecting the down-cycle in the offshore & marine industry to be more protracted than in previous cycles. The offshore & marine player said this on Wednesday as it posted a 48.2 per cent year-on-year plunge in first-quarter net profit to S$54.83 million amid sharply lower turnover and gross profit margin. This translated to earnings per share of 2.63 Singapore cents, down from 5.07 Singapore cents.

For the three months ended March 31, turnover fell 29.6 per cent to S$918.43 million, from S$1.3 billion a year earlier, as lower revenue recognition from rig-building projects more than offset higher contributions from floaters and offshore platforms.

Group gross profit declined 52.3 per cent to S$80.61 million as gross profit margin fell to 8.8 per cent from 13 per cent. Operating profit was 48.1 per cent lower at S$71.73 million.

Finance costs were up by 87.4 per cent at S$17.86 million on higher interest expense from higher bank borrowings.

SembMarine secured S$60 million in new contracts for LNG modules fabrication in Q1 2016. Its net order book year-to-date stands at S$9.7 billion with deliveries and completion stretching until 2020.

SembMarine's chief executive Wong Weng Sun acknowledged during the results briefing the ongoing challenges in the macro-environment facing the O&M sector. "The upstream oil and gas industry is well into its second year of weak prices and capex cuts following the collapse of oil prices since the second half of 2014," Mr Wong said, adding: "The recent oil price rally appears to be fizzling out and SembMarine maintains its cautious outlook in the midst of such continued volatility and uncertainty."

In the days leading up to the Q1 results briefing, SembMarine has unveiled further updates to the legal proceedings pertaining to two rig-building contracts with Sete Brasil.

SembMarine announced on April 22 that it has commenced arbitration proceedings against various subsidiaries of Sete Brasil after shareholders of Brazilian rig-owning unit of Petrobras approved its proposed bankruptcy filing. Sete Brasil has rig-building contracts valued at US$5.6 billion with SembMarine's yard group.

"The group has in the last financial year made provisions of S$280 million (in addition to the S$329 million provisions for the Sete Brasil contracts) in case of prolonged deferment or possible cancellation of rigs. We believe that the provisions are sufficient under the present circumstances," said Mr Wong.

SembMarine's rig-building subsidiary PPL Shipyard has started arbitration proceedings in April against Marco Polo Drilling (MPD) over a disputed US$214.3 million rig-construction contract. These proceedings are not affected by a stay of action in the High Court to recover amounts due from Marco Polo Marine, MPD's parent and the guarantor of the contract, said SembMarine. PPL will pursue this claim either by way of appeal against the court's stay of action or pursue it through arbitration.

Amidst volatile market conditions, Mr Wong maintained that the yard group would continue to focus on the timely and effective execution of a healthy order book. But he also said the yard group has sought to trim costs by allowing "natural attrition and removal of less efficient sub-contractors". Reduction in the present headcounts at Brazil EJA yard is under consideration in light of the latest developments at Sete Brasil. "We believe our investments in new facilities and capabilities, such as GraviFloat, will enable us to deliver sustainable returns for the group and the shareholders," he said.

SembMarine has pressed on with a step-up acquisition to raise its stake in Gravifloat to 56 per cent from 12 per cent. The proprietary technology held by Gravifloat can be applied in the power sector.

Sembcorp Marine shares closed at S$1.67, down half a cent, before results were released on Wednesday. Net asset value per share was 122.18 Singapore cents as at March 31 compared to 120.24 Singapore cents as at Dec 31, 2015.

This article was first published on April 28, 2016.
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