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Is An Oil & Gas Court Fight Going To Happen Between SembCorp Marine Ltd And Marco Polo Marine Ltd?

On Tuesday, Marco Polo Marine Ltd (SGX: 5LY), a marine logistics company with a market capitalization of about S$70 million, announced that it has terminated a US$214.3 million (approximately S$306 million) rig building order with PPL Shipyard, a subsidiary of offshore and marine giant SembCorp Marine Ltd (SGX: S51).

According to a news report published on the same day, Marco Polo had blamed Sembcorp Marine’s “failure to comply with certain of its material contractual obligations” as the reason for the termination of the jack-up rig order. Marco Polo is also requesting for the refund of the 10% deposit (US$21.4 million) that it has paid to PPL Shipyard.

Then, in the wee hours of Wednesday morning, SembCorp Marine hit back with an announcement of its own. The nearly S$5 billion marine and offshore engineering outfit stated that it has not received any notice from Marco Polo regarding the termination prior to the latter’s public announcement.

PPL Shipyard also declared in the same announcement that it disagrees with the allegations made by Marco Polo and sees the logistic company’s action as a “repudiatory breach of the contract.” SembCorp Marine has plans to claim compensation amounts as stated in the contract.

As you can see, this is now a situation of “he-says, she-says”. Interestingly, given the current downturn in the offshore oil and gas industry, there’s a case to be made that Marco Polo may not be able to afford the rig even if the order isn’t cancelled.

Based on Marco Polo’s latest financials, its balance sheet has S$183.5 million in total debt but just S$15.5 million in cash as of 30 June 2015. That works out to a net-debt to equity ratio of nearly 1, which is far from a healthy figure.  Moreover, Marco Polo had recorded negative operating cash flow in the first three-quarters of its fiscal year ended 30 September 2015 (FY2015).

All these are signs that the company may not be able to take delivery of the US$214.3 million jack-up rig in question. That’s especially so in an environment where low oil prices makes the profitable chartering of the rig upon delivery questionable.

As of the time of writing (12:04 pm), it is still unclear how the two companies would resolve their issue; going to court for this matter might not benefit them at all.

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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 Stanley Lim doesn't own shares in any companies mentioned.