Here’s What SembCorp Marine Ltd’s Shareholders Should Know About the Marco Polo Marine Ltd Debacle

Oil rig builder Sembcorp Marine Ltd (SGX: S51) has endured some tough times of late.

Earlier in the year, one of its major customers, the Brazilian oil & gas company Sete Brasil, filed for bankruptcy. Meanwhile, Sembcorp Marine is also involved in a legal tussle with another of its customers, Marco Polo Marine Ltd (SGX: 5LY).

Moreover, Sembcorp Marine had to slash its 2015 dividend by more than half, casting doubt on the sustainability of its dividend in the future.

The company had released its latest annual report for 2015 a few months ago. The report had shed some light on the company’s dispute with Marco Polo Marine that may interest investors. The case involves Sembcorp Marine’s subsidiary, PPL Shipyard Pte. Ltd.

Here’s some background on the legal proceedings that was shared in Sembcorp Marine’s annual report:

“During the year, a customer, Marco Polo Drilling (l) Pte. Ltd. (“MPD”), alleged that a subsidiary [referring to PPL Shipyard Pte. Ltd.] of the Group [referring to Sembcorp Marine] has not complied with certain of its material contractual obligations and purported to terminate the contract and consequently sought refund of 50% of the initial instalment being the sum of S$30,094,000 (US$ 21,430,000) from the subsidiary and related interest charges.

The subsidiary disagrees with MPD’s allegations and the right to terminate the contract, and has not recognised a provision for the refund, as claimed by MPD. The subsidiary strongly believes that it has the contractual entitlement to retain the 50% of the initial instalment.”

PPL Shipyard has since terminated the contract with Macro Polo Marine after the latter failed to pay the balance of the 50% of the initial instalment. Sembcorp Marine said that the payment has been due since February 2014.

Sembcorp Marine will continue to pursue the case:

“The subsidiary [referring to PPL Shipyard Pte. Ltd] continues to seek the payment of S$30,094,000 (US$21,430,000) from MPD since the subsidiary’s contractual right of payment extends to the full initial received and receivable from MPD.

The disputes with MPD may in due course be referred to arbitration. The subsidiary has also commenced an action against MPD’s parent company in the Singapore High Court on 1 December 2015 to recover among others the balance 50% of the initial instalment.”

Given the nature of the dispute, Sembcorp Marine has elected not to recognise the aforementioned sum of S$30,0940,000 on its balance sheet as of 31 December 2015.

Investors may want to note that Sembcorp Marine had generated over S$5 billion in revenue and S$290 million in losses in 2015. As such, the Marco Polo dispute is unlikely to move the needle for Sembcorp Marine.

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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.