SembCorp Marine Ltd’s Latest Earnings: What’s Next After A 14% Decline In Profit?

Sembcorp Marine Ltd (SGX: S51) released its fiscal first-quarter earnings (for the three months ended 31 March 2015) yesterday evening.

For a quick introduction before we dig into the firm’s numbers, Sembcorp Marine’s a builder of many different types of rigs used in the drilling for oil, such as semi-submersibles, jack-ups, and drillships. The company, which is majority-owned by conglomerate Sembcorp Industries Limited (SGX: U96), also helps convert ships to suit its customers’ purpose.

With that, let’s get going.

The numbers

Here’s a brief rundown of Sembcorp Marine’s numbers for the quarter:

  1. Quarterly revenue dipped by 2% year over year to S$1.304 billion.
  2. Higher costs impacted the bottom-line as Sembcorp Marine’s profit for the quarter fell 14% from a year ago to S$106 million.
  3. Consequently, the firm’s earnings per share (EPS) also slid by 14% to 5.07 Singapore cents.
  4. Sembcorp Marine ended 31 March 2015 with S$1.127 billion in cash and S$2.035 billion in debt. The rig builder’s balance sheet has deteriorated significantly compared to a year ago when there was S$2.283 billion in cash and just S$810.8 million in borrowings.
  5. Sembcorp Marine’s cash flow picture also leaves much to be desired. Operating cash flow for the quarter came in at –S$49.7 million; with capital expenditures of S$221.6 million, the rig builder’s quarterly free cash flow thus comes up to –S$271.3 million. This is a big step backwards from a year ago when the selfsame figures for Sembcorp Marine were S$685.7 million (operating cash flow), S$138 million (capital expenditures), and S$547.6 million (free cash flow).

To sum it up, Sembcorp Marine had seen both its revenue, earnings, and cash flow fall during the quarter.

Investors might want to keep a close watch on the company’s weakening balance sheet. That’s especially so when the oil & gas industry is in a really rough spot at the moment (more on this later); piling on the borrowings and depleting the cash balance is not something that can bolster Sembcorp Marine’s ability to weather the storm of lower oil prices.

For some added perspective on the balance sheet picture, Sembcorp Marine ended December 2014 with S$1.079 billion in cash and S$1.741 billion in borrowings. So, the rig builder has seen its balance sheet deteriorate even on a quarter over quarter basis.

Business highlights and future outlook

A good way to track the progress of Sembcorp Marine’s business would be through its net order book as that makes up part of the firm’s future revenue. And on that front, there are some worrying signs. The rig builder ended March 2015 with a net order book of S$10.9 billion; a quarter ago at end-December 2014, the figure was S$11.4 billion; at 31 March 2014, the figure stood at S$12.9 billion.

Lower oil prices have resulted in the oil and gas industry being in a pinch right now (as mentioned earlier) and the picture is not pretty for rig-builders like Sembcorp Marine. To that point, here’re some comments from the firm given in its earnings release (emphasis mine):

“The ongoing cutback in global exploration and production expenditure has resulted in the scarcity of new orders for the industry this year. Customers strive to conserve cash and consolidate their offshore fleet operations as charters are not renewed or are renewed at significantly lower rates. New rigs face the prospect of not securing charters despite their higher technical specifications and superior capabilities. As a result, [Sembcorp Marine] faces a challenging year ahead.

Meanwhile, Brazil’s oil and gas industry continues to be mired in uncertainty. We continue to engage with our customers to find the best way forward for our drillship projects and are exploring all options including slowing down the construction.”

In particular, the progress of Sembcorp Marine’s business in Brazil is worth noting given the turmoil in the industry brought on by the corruption scandal involving Brazilian state-owned oil producer, Petroleo Brasileiro SA (more popularly known as Petrobras).

A Fool’s take

Sembcorp Marine mentioned in its latest earnings release that it “expects to build up its order book despite the challenging market environment” and that confidence can be a good thing for shareholders to note.

But in the meanwhile, investors might want to watch Sembcorp Marine’s balance sheet. Taking on more borrowings and incurring higher interest expenses at a time when customers aren’t making new orders and construction of existing orders may have to slowdown may not exactly be the most prudent thing to do.

The market does not seem to like what it has seen, with Sembcorp Marine’s shares falling 1.99% to S$2.95 at the time of writing (10:00 am). At that price, the rig builder’s valued at 11 times its trailing earnings.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.