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, the company had to slash its 2015 dividend by more than half Yet, despite the dark clouds, there may be rays of sunshine. Sembcorp Marine’s latest annual report had a few snippets which may interest investors. On its order book “Together with the $3.17 billion of new orders secured…
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, the company had to slash its 2015 dividend by more than half
Yet, despite the dark clouds, there may be rays of sunshine. Sembcorp Marine’s latest annual report had a few snippets which may interest investors.
On its order book
“Together with the $3.17 billion of new orders secured in 2015, Sembcorp Marine’s net order book as at 31 December 2015 stands at $10.37 billion, with deliveries to 2020. The majority of our order book is based on progress payment terms, with only about $2 billion of the order book for drilling rigs that are on back-ended payment terms.
The average upfront payment for these rig contracts is close to 30%. The above order book profile should minimise the need for fresh working capital to fulfil such orders in the next years.”
Despite the tough operating environment, Sembcorp Marine was able to pick up new orders in 2015. The firm ended the year with a net order book of $10.4 billion, lower than the $11.4 billion recorded at end-2014.
Sembcorp Marine did point out that the orders are also based on progress payment terms. This could mean that the company may receive a higher percentage of payments upfront; this might be important given its debt-levels which I shall touch on shortly.
On its operating cash flow
Source: SembCorp Marine’s earnings report and annual report
At the end of 2015, SembCorp Marine had around $629 million in cash and equivalents and a hefty $3.4 billion in debt. The rate of increase in debt has been staggering in the last two years, as the graph above shows. Furthermore, Sembcorp Marine recorded negative free cash flow of $1.92 billion for 2015. This brings us to the following statement from Sembcorp Marine:
“In 2015, the Group generated $536 million of Operating Cash Flow (before working capital changes). We believe this trend of positive Operating Cash Flow generation will continue to help fund our operations and that the Group’s working capital needs have peaked.
On capital expenditure (capex), a large part of our new yard capex for the Tuas Boulevard yard in Singapore and Estaleiro Jurong Aracruz (EJA) yard in Brazil has been incurred.”
In short, Sembcorp Marine is expecting capital expenditures to decline. The firm also expects its working capital requirements to fall. The combination of the two may lead to positive free cash flow in the future, but for 2015, SembCorp Marine had a negative $989 million in cash flow from operations and $933 million in capex.
On room for more debt and the need for careful capex
“Going forward, we will only proceed with yard capex required for executing our secured contracts, while deferring nonessential capex. The Group continues to adopt a disciplined approach to cash flow and liquidity management.
Barring unforeseen developments, we believe we have sufficient debt headroom, and with existing facilities and continued support of our bankers and bondholders, we will be able to execute our secured orders.”
The statement on debt-headroom above suggests that Sembcorp Marine may still take on more debt. Investors may want to watch for improvements in the company’s net orderbook and operational figures.
In the first-quarter of 2016, Sembcorp Marine had $955.3 million in cash and equivalents and $3.9 billion in borrowings. It also recorded negative free cash flow of $175 million and a net order book of $9.7 billion.
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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.