ENERGY & OFFSHORE | Marianne Estioco, Singapore

SembMarine faces massive profit cut on back of Marco Polo cancellation fiasco

Other contracts are also at risk.

Marco Polo Drilling's decision to cancel its US$214.3m rig construction contract with Sembcorp Marine will spell trouble for one of Singapore's largest shipbuilding groups.

Analysts warn that SemMarine will face a "substantial" profit reversal in the fourth quarter, as the rig is nearly finished and was in fact slated for delivery by the end of the year.

"With the rig worth USD214.3m and at nearly full completion, we expect a SGD35m-40m profit reversal in 4Q15. This assumes mid-teen margins for the rig, above SembMarine’s around 10% blended margins as this was being built to its proprietary design," said a report from RHB Research.

RHB added that Marco Polo's allegations that there were cracks on the rig has dire implications for SembMarine's build quality.

Meanwhile, DBS highlighted that profit margins for this project might be higher than SembMarine's traditional net margin of 10%.

"We expect SMM to reverse the revenue and profit recognized for this contract in 4Q15, which could be around S$217m and S$21.7m respectively, assuming 80% recognition of the S$271m contract price and net margin of 10%. We reckon the actual margins could be higher for the unit as the high specification jackup is built to PPL’s proprietary Pacific Class 400 design," DBS said.

Although SembMarine has refuted Marco Polo's accusations, this cancellation might cause the company to lose even more contracts.

"Six jack-up rigs [are] now facing non-delivery. SembMarine may likely face cancellations on the jack-up rigs, on which it reversed profits in 3Q15. This first officially cancelled one is now the sixth potentially undelivered jack-up rig on its books, with a >USD1.2bn value in total. Should resale values fall below costs less deposits, SembMarine may have to take in further losses," said RHB.

In particular, analysts are worried that SembMarine's other clients--who are all struggling with the oil price downturn--might take a leaf from Marco Polo's book and scrap their contracts with SembMarine as well.

"Even if SMM did not breach its contract obligations, we worry that other weak clients may follow Marco Polo’s actions," Maybank Kim Eng said in a report.

Marco Polo has not secured a charter contract for the rig, and its financials are becoming stretched in the low oil price environment. The company has also recently amended terms on its bonds.

"It would require huge funding if it were to take delivery of the rig, which would further stress its balance sheet," Maybank Kim Eng noted.

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