Risks At Sembcorp Marine Ltd May Have Just Climbed

Sembcorp Marine Ltd (SGX: S51), one of the world’s largest oil rig builders, released its results for the first-quarter of 2016 earlier this week. It was not a pretty sight.

Revenue for the quarter was down by 30% year-on-year, while the bottom-line suffered a haircut of nearly 50%. But beyond these headline numbers, there is one aspect of the company’s business that point to the possibility that risks at Sembcorp Marine may have increased since the end of 2015.

That would be the deterioration in Sembcorp Marine’s balance sheet. The oil-rig builder ended 2015 with a net-debt to equity ratio (where net-debt refers to total borrowings and capital leases net of cash and short-term investments) of 103%. At that time, the ratio was the highest it had been since the last-quarter of 2005. You can see this in the following chart:

Sembcorp Marine's quarterly net-debt to equity ratio since last-quarter of 2005
Source: S&P Global Market Intelligence

As a reminder, generally speaking, the higher the net-debt to equity ratio is, the weaker a company’s balance sheet is. Sembcorp Marine turned in a net-debt to equity ratio of 107% in the first-quarter of 2016. While the sequential increase from 103% to 107% is not an alarming jump by any means, it is an increase nonetheless, and points to how the company has not managed to strengthen its balance sheet.

It’s anyone’s guess as to when – or even if – oil prices will rebound closer to the US$100 per barrel or so level that it was at just two years ago. For perspective, oil is sitting at around US$45 per barrel right now. Sembcorp Marine itself commented in its first-quarter 2016 earnings release that the current down cycle is “expected to be more protracted than previous cycles.”

The crash in oil prices has already claimed Sete Brasil as a victim. Sete Brasil, which recently filed for bankruptcy protection, is a major customer of Sembcorp Marine.

A strong balance sheet is crucial for survival in this climate. But that’s something missing from Sembcorp Marine at the moment. Its cash-flow picture does not help ether.

Sembcorp Marine ended the first-quarter of 2016 with negative cash flow from operations of S$73 million. As the chart below shows, the company has had trouble generating positive cash flow from operations over the past few years.

Sembcorp Marine's cash flow from operations since first-quarter of 2013
Source: S&P Global Market Intelligence

An inability to generate cash, a deteriorating balance sheet, and a poor macroeconomic environment can become a very painful mix for a company. And that’s something Sembcorp Marine is juggling with at the moment.

None of the above is meant to say that the company is guaranteed to run into even more trouble in the future. But, risks at Sembcorp Marine have increased – given its weakening balance sheet – and that’s something investors may want to note.

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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 companies mentioned.