SINGAPORE (Mar 6): Despite an uptick in crude oil prices in 2019, a recovery in oil exploration and production activity was somewhat limited. This inevitably prolonged the downturn in the oil services industry, which has seen a glut of rigs and offshore platforms. Given the challenging environment, Sembcorp Marine (SembMarine) had to endure another difficult year.
For FY2019 ended Dec 31, SembMarine reported a y-o-y revenue decline of 41% to $2.88 billion. This came on the back of lower revenue recognition from rigs and floaters and offshore platform projects. As a result, the company remained in the red and posted a wider loss of $137.2 million. The accelerated depreciation of the company’s Tanjong Kling Yard also did not help.
SembMarine’s underlying problem largely lies with the company’s difficulty in finding new jobs. Last year, the company managed to secure new contracts worth only $1.49 billion. This was up 26.3% from $1.18 billion the year before. While the increase in new contracts is commendable, it is a far cry from the amount of new contracts it had obtained prior to 2015.
Back then, the company was usually able to secure new orders worth at least $3 billion and above – the highest being $11 billion in FY2012. The exception was in FY2009 – in which the company managed to clinch new orders worth only $1.2 billion, following the 2008 global financial crisis.
Nevertheless, the only bright spot is SembMarine’s repairs and upgrades business. During the year, the segment recorded revenue of $605 million, up 27% y-o-y, from $476 million. This came mainly from higher revenue per vessel of $2.16 million, owing to improved vessel mix of higher-value works. This is despite the number of vessels repaired or upgraded at the company’s yards falling to 280 from 296 in 2018.
Now, amid the widening spread of the novel coronavirus, the oil industry is bracing for lower oil demand. This has led the West Texas Intermediate and Brent crudes to fall 23.4% and 22.5%, respectively, to US$46.78 ($64.84) and US$51.13 a barrel since the start of the year.Will Sembcorp be able to clinch more new contracts this year?
According to DBS Group Research, SembMarine could benefit from several potential major contracts. For one, the company’s Gravifloat LNG exporting terminal could be revived, following the Poly-GCL tie-up with its new partner, China Communications Construction Company (CCCC), to invest in a majority stake in the project. “This could breathe new life into the project that has been delayed for years and hopefully brings [SembMarine] a step closer to finalisation of the Gravifloat contract that is expected to be worth [about] $1 billion,” DBS analyst Ho Pei Hwa writes in a note dated Feb 20.
SembMarine could also build a floating production storage and offloading (FPSO) vessel for Siccar Point Energy E&P. DBS notes that the company is optimistic that the latter could reach a final investment decision as soon as mid-2020. The company has already concluded the exclusive front-end engineering and design (FEED) using its proprietary Sevan geostationary circular hull, to be deployed at the Cambo field in the UK Continental Shelf, it adds.
Moreover, the Sete Brasil drillships could provide more jobs for SembMarine. Following the company’s settlement with Sete last year, new owner Magni Partners is taking over the two most advanced rigs built by SembMarine. “We expect order book accretion for the remaining works to complete the rigs,” says Ho.
In addition, the company is in negotiations with a potential buyer for the third and fourth half-built Sete drillships. This will not only recoup the costs incurred but also result in new orders, says DBS.
In addition, SembMarine could secure a $800 million contract from SeaOne Holdings for the construction of two compressed gas liquid (CGL) carriers. DBS notes that the latter has completed its preliminary study for the CGL carriers.
Meanwhile, SembMarine could clinch contracts for offshore wind farm projects. Wong Weng Sun, president and CEO of SembMarine, says offshore wind is a growing sector that is opening up “good possibilities” for the company. “To grow our order volume in this segment, we will raise our brand awareness, especially in market regions that are unfamiliar with our solutions and track record,” he says at the company’s FY2019 results briefing on Feb 20.
Analysts, however, are remaining cautious about SembMarine’s prospects ahead. “In addition to oil market sentiment, we believe rerating catalyst on [SembMarine] hinges on contract win momentum, which has been lagging expectations the past two years,” says Ho, who has a “hold” rating for the stock with a lower target price price of $1.35 from $1.40 previously.
CGS-CIMB Research says it expects SembMarine to clinch new orders of a “similar quantum” in 2020, compared to 2019. The brokerage also has a “hold” call for the stock with a lower target price of $1.20 from $1.26 previously. Both DBS and CGS-CIMB are forecasting the company to remain in the red this year, on the back of lower revenue.
Shares of SembMarine are down 18.2% so far this year to close at $1.08 on March 4.
