1 Reason to be Optimistic About SembCorp Marine Ltd

SembCorp Marine Ltd (SGX: S51) had a tough year in 2015. The company found itself in troubled waters, as lower oil prices led to a sharp revenue decline and a loss as well as financial stress for at least one of its customers.

With all these going on, Sembcorp Marine’s shares have shrunk by nearly 50% in value since the start of 2015. But, amidst all that carnage may be a silver lining.

Deep red

SembCorp Marine’s free cash flow has steadily deteriorated over the past few years. The graph below gives a summary of the oil rig builder’s operating cash flow, capital expenditure, and free cash flow from 2005 to 2015.

OCF FCF Capex SembCorp Marine
Source: S&P Global Market Intelligence

The fall in the free cash flow has been down to two main factors.

First, operating cash flow has fallen into negative territory in 2014 and 2015. Second, capital expenditure has also risen, exacerbating the free cash flow issue. The negative free cash flow may have already had an impact on Sembcorp Marine’s investors – the company had cut its dividend in 2015 by more than half.

Yet, comments made by Wong Weng Sun in a recent briefing for the company’s 2015 fourth-quarter earnings had provided a silver lining. Wong, who is Sembcorp Marine’s chief executive, said:

“In 2015, we generated $536 million of Operating Cash flow (before working capital changes). We believe that our working capital needs have peaked, and we expect to see a reduction this year.

On capital expenditure, as shared earlier, a large part of our new yard capex has been incurred. Going forward, we will only proceed with yard capex that are needed for execution of our secured contracts, while deferring non-essential capex.”

Wong did not quantify the figures in the quote above, but we may be able to see lower capital expenditure from Sembcorp Marine as well as an improvement in operating cash flow (from better working capital management) going forward.

The combination could lead to a “less bad” free cash flow situation for Sembcorp Marine. What the oil rig builder’s free cash flow looks like could be something investors should keep an eye on in the firm’s next few financial reports.

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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.