Sembcorp Marine Ltd (SGX: S51) is in a bit of a funk at the moment. The oil rig builder suffered a $290 million loss in 2015. In the second-quarter of 2016, its revenue shrank by a quarter while profits plunged by almost 90%. Wong Weng Sun, Chief Executive of Sembcorp Marine, covered a myriad of the company’s issues during the recent 2016 second-quarter earnings briefing. Here’re five quotes from Wong you might not want to miss. On a prolonged downturn Wong noted that oil prices have recovered from its lows. But, the recovery is not expected to bring orders to Sembcorp…
Sembcorp Marine Ltd (SGX: S51) is in a bit of a funk at the moment.
Wong Weng Sun, Chief Executive of Sembcorp Marine, covered a myriad of the company’s issues during the recent 2016 second-quarter earnings briefing.
Here’re five quotes from Wong you might not want to miss.
On a prolonged downturn
Wong noted that oil prices have recovered from its lows. But, the recovery is not expected to bring orders to Sembcorp Marine’s doorstep. He explained:
“Despite oil prices recovering from recent lows of below US$30/barrel to the present US$45 – US$50/barrel range, industry experts continue to forecast a prolonged downturn for the upstream oil and gas industry. Understandably, with fewer drilling contracts and surplus of rigs, some drillers continue to be unable to take delivery of their new build rigs.”
On delays in delivery
Unfortunately, there have also been delays in the delivery of jackup rigs. Wong shared details about the delays for four rigs in the quote below:
“Delivery of several rigs in our order book has been deferred, including 3 jackups for Oro Negro and 1 jack-up for Perisai. We are currently in discussions with these customers to develop solutions for the rigs. All completed rigs have been technically accepted by their respective customers.”
On top of this, there is the legal case with Marco Polo Marine Ltd (SGX: 5LY) for Sembcorp Marine to deal with. Wong said that arbitration proceedings are ongoing. You can find out more about the Marco Polo Marine case here.
On cash flow and the balance sheet
So, there have been delays in customer deliveries. This begs the questions: How is Sembcorp Marine getting paid? How strong is its balance sheet? Wong shared this statement as well:
“The Group remains committed to actively manage its balance sheet to maintain a healthy financial position. We remain focused on the timely and effective execution of our order book to ensure successful deliveries of our projects so as to improve our cash flows and liquidity position.
The majority of our current S$9.2 billion order book is with progress payment terms. Less than 20% of our order book is for drilling rigs which are on back-ended payment terms. As such, the need for fresh working capital to fulfil such orders in the next years will continue to decrease.”
In short, the majority of Sembcorp Marine’s current order book will see customer payments come in earlier in the process. Wong is hopeful that there will be less need for fresh working capital, as a result.
Speaking of operating cash flow, Wong also had some good news to share. He believes that Sembcorp Marine’s cash flows will enable it to reduce its net gearing to less than one in the near future:
“In 1H2016, we generated S$175 million of Operating Cash flow (before working capital changes). Following further receipts from recent deliveries, including the Noble Lloyd Noble rig and fixed platform projects, we generated a further positive operating cash flow of S$909 million in the month of July 2016. This will reduce our net gearing from 1.07x in 1Q2016 to less than 1.0x presently.
As shared during our FY15 results briefing, we believe our working capital needs have peaked, and gearing should improve in the course of 2016.”
But if we circle back to his first quote, the challenges still remain for Sembcorp Marine. The rig builder has cut its interim dividend in 2016 by over 60%. Wong ended his speech with a statement on where Sembcorp Marine’s priority will be:
“While it is unclear how protracted this downturn will be, we have taken prudent steps to position ourselves for the challenges ahead. We will continue to adopt a disciplined approach in managing our costs and finances to maintain a healthy balance sheet to ensure adequate cash and improved gearing. Our key priority remains the timely and effective execution of our order book.
We will continue to proactively seek fresh opportunities to grow our business and order book to deliver sustainable returns for the Group and our shareholders.”
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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.