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Here’s How Sembcorp Marine Ltd May Survive the Oil Slump

Sembcorp Marine Ltd (SGX: S51) has been caught in a funk lately with dark clouds gathering around it.

The oil-rig builder is facing repercussions from the potential bankruptcy of one of its major customers, the Brazilian oil & gas company Sete Brasil. Sembcorp Marine had also cut its dividend in 2015 by more than half. The resulting impact has seen Sembcorp Marine’s shares shrink by over 50% in value since the start of 2015.

Lower oil prices is the likely culprit behind the fall. After all, oil prices have fallen dramatically since mid-2014 (from over US$100 per barrel to less than US$40 today), and Sembcorp Marine’s business activities are tied to the price of the fuel. Thing is, it is unlikely that anyone will know when oil prices will recover.

Tang Kin Fei, the chief executive of SembCorp Industries Limited  (SGX: U96), expressed the same sentiment in a recent earnings briefing. Sembcorp Industries is the parent company of Sembcorp Marine with an ownership stake of 61%. Tang said:

“Nobody will know when the oil and gas market will recover, that is the big crystal ball. If I know the answer … That’s really difficult to predict.”

But Tang did not stop there. He also took time to elaborate on the various capabilities of Sembcorp Marine. In particular, he pointed towards a key slide in the briefing which is shown below:

2016-02-29 SembCorp Marine Capability Slide
Source: Sembcorp Industries’ presentation

Tang highlighted the difference in Sembcorp Marine’s solutions in the exploration sector and the production sector:

“I would like to elaborate on this slide. This is a very important slide.

We have intentionally said that our Marine business has a range of capability. We have capabilities to provide services under the exploration segment, like rigs, drillships and so on. That segment, a lot of oil companies are cutting back on expenditure in this segment.

But in terms of oil and gas production solutions, once the oil companies have made the discovery, after exploration, and they find that the fields are worthwhile developing then they will proceed with the oil and gas production. For some countries, because of the oil and gas production has gone down, they need to replace their production levels.

So, there are activities. So, projects like [the] Culzean project in the North Sea for our SMOE (a SembCorp Marine subsidiary) or offshore platform division, secured a billion dollar project in the North Sea for the production area. We also have this specialized crane secured for this area, and this specialized crane is used for removing redundant platforms that has already completely its function. It has to be removed from the offshore area. So, they are quite a different business segment.

Therefore, I think we need to differentiate that our Marine has a lot of capabilities, besides exploration, we have production, specialised shipbuilding, we have maintenance, and at the bottom [of the slide] are, also new technical capabilities – in terms of SSP [Satellite Services Platform], in terms of GraviFloat technology. GraviFloat is supplying for import facilities for LNG. Singapore has a LNG terminal.

Whether oil prices are up or down, there is still LNG import into the terminal. Instead of building it onshore, we have the capability to build it near-shore. We can pipe in the LNG into the island. So, that area is a matter of demand for power rather than oil price affected. So, we think that with our new facilities at our Tuas Yard, SembCorp Marine is better positioned to weather this difficult period.”

So as you can see from Tang’s words, the production side of the oil and gas industry may still offer a lifeline for Sembcorp Marine. This would be important, as the Marine giant’s net orderbook at the end of 2015 was S$10.4 billion, nearly 9% lower than where it was at the end of 2014. For now, let’s see what 2016 will bring.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.