3 Quotes that Sum Up SembCorp Marine Ltd’s Challenges Heading into 2017

SembCorp Marine Ltd (SGX: S51) is going through a tough stretch in its business.

In its 2016 annual report, SembCorp Marine’s chief executive Wong Weng Sun summarised the challenges ahead for the rig builder. The headwinds comes at several levels and may not always be within SembCorp Marine’s control. There were three quotes which I thought captured the nature of challenges ahead:

1. Industry woes

Lower oil prices affect the industry in more than one way. Wong said:

“Oil prices, heavily depressed by a persistent supply overhang, not only brought more cuts to upstream oil and gas capex but also forced down day rates and utilisation levels of existing rigs to current-cycle lows.”

The net effect of lower oil prices on SembCorp Marine is two-fold.

As oil prices declined, rig day rates were forced down, crimping the ability of SembCorp Marine’s customer to earn revenue. From there, customers cut capital expenditure, which reduced the amount of rig orders to SembCorp Marine.  

2. Fighting in a shrinking sandbox

SembCorp Marine might be a leading player in the industry, but it is not immune to competitive price pressure. Wong said:

“Competition intensified as Sembcorp Marine and other players vied for significantly fewer and smaller orders, while lenders seeking to reduce their risk exposure made it even more challenging by withdrawing credit from the market.”

As the number of customer orders shrank, competition heated up and made it hard for companies to earn a decent margin. Banks, which saw the increase in the oil industry’s risk, withdrew, and made it more challenging for the players to remain afloat.  

3.  Economic uncertainty

The economic and political environment did not help either. Wong added:

“We were also confronted with political outcomes in the US and the UK that stirred further uncertainties into an already unsettled business environment amid a slowing global economy.”

If there is one thread that ties all the three points together, it is that SembCorp Marine is not alone in the industry and is dependent on several factors, including oil prices, to be able to do well.

But this is the business that SembCorp Marine is in, and it is up to SembCorp Marine to position itself for when the economic wind blows in its favour.   

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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.