Is SembCorp Marine Ltd Heading For More Trouble?

The price of oil has collapsed from over US$100 per barrel a year ago to sub-US$50 currently. As a result, capital expenditures by upstream oil producers have slowed.

These have made things very difficult for giant oil rig builder SembCorp Marine Ltd (SGX: S51). In its most recent quarterly earnings (for the third-quarter of 2015), SembCorp Marine’s revenue and profit suffered year-on-year declines of 34% and 77%, respectively.

Meanwhile, its cash flow from operations for the first three-quarters of 2015 came in at a negative S$408 million. For a company that currently only has S$827 million in cash on its balance sheet and S$2.85 billion in debt, SembCorp Marine’s cash-burn is worrying. A glance at SembCorp Marine’s balance sheet over the past five years also does not assuage any fears – the total debt to equity ratio has spiked from 0.3% at the end of 2010 to 90% in the most recent quarter.

Can things get any worse for SembCorp Marine? Sadly, they may. Earlier this week, the company received an order-termination from Marco Polo Marine Ltd (SGX: 5LY) for a jack-up rig through a public announcement by the latter. (It appears that the the two companies are in dispute over the matter now; you can read more about it here).

But, all may not be lost at SembCorp Marine. Despite the weak business environment, the company commented in its third-quarter earnings release that it has still managed to win S$2.9 billion worth of new contracts in 2015 thus far. As of 22 October 2015, the company’s total order book stands at S$11.6 billion, which is nearly double its full year revenue in 2014. Then, just yesterday, SembCorp Marine announced another contract win to build a new floating, storage, offloading vessel (FSOV) for Modec; no figures were provided, however

The key now for SembCorp Marine is to preserve its cash and improve its balance sheet. As long as SembCorp Marine has the strength to withstand the market downturn, there might be light at the end of the tunnel for the company. But, given the current situation, the light is sadly, rather dim.

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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.