Sembcorp Joins Keppel With Profit Plunge as Oil Damps Demand

  • Slashes FY16 capital expenditure to half of previous year’s
  • To focus on costs, balance sheet during ‘challenging times’

Sembcorp Marine Ltd., the world’s second-biggest builder of oil rigs, joined its larger rival Keppel Corp. in reporting a profit slump last quarter as projects were deferred or canceled due to low crude oil prices. Shares fell.

Net income at Singapore-based Sembcorp plunged 90 percent in the quarter through June to S$11.5 million ($8.5 million) from S$109.2 million a year earlier, the company said in a statement to the Singapore exchange after trading hours Thursday. Sales dropped 25 percent to S$908.5 million.

Battling weak demand, the company said it will slash this year’s capital spending to half of 2015, adding it will continue to focus on costs, liquidity and balance sheet management during these “challenging times.” Oil prices that have dropped 60 percent in the past two years have dried up demand for for drilling and production, pushing many Asian shipyards to cut jobs and consider temporary closure of docks.

“Global economic growth remains subdued and uncertain,” Chief Executive Officer Wong Weng Sun told reporters in the city. “Capital investments in oil and gas are significantly down and this will continue to have a negative impact on the recovery process.”

More than $400 billion of proposed energy projects worldwide have been delayed since mid-2014 and pushed into 2017 and beyond, according to consulting firm Wood Mackenzie Ltd. Royal Dutch Shell Plc, Europe’s largest oil company, said Thursday that it has the option to cut expenditure further and defer more projects if oil prices stay blow $50 a barrel.

Harsh Winter

Keppel on July 22 predicted a long, harsh “winter” in its rig-building business after the company’s net income fell 48 percent to S$205.8 million in the second quarter. The company said it may consider reducing its workforce and mothballing some facilities in its rig-building operations because of excess capacity.

Shares of Sembcorp Marine declined 0.7 percent to S$1.425 as of 12:38 p.m. in Singapore, after dropping as much as 1.7 percent earlier. The stock has declined about 18 percent this year, versus little change in the city’s Straits Times Index.

The company has reduced its workforce by about 6,000 since mid-2014, Wong said at the briefing, adding it “continues to rigorously optimize its manpower requirements.”

“The company remains bogged by multiple deferment requests from its key clients,” said Royston Tan, a Singapore-based analyst at Daiwa Capital Markets. “These rigs could ultimately be wholly or partially owned by SembMarine due to its clients’ inability to take delivery.” He has a sell recommendation on the stock.

New Orders

Sembcorp Marine said it will focus on delivering from its order backlog, which stood at S$9.2 billion as of end-June, falling from S$10.4 billion at the end of 2015. The firm made S$609 million in provisions for projects facing delivery delays and potential cancellations last year. New orders so far this year were S$320 million, versus S$1.3 billion in the same period a year ago.

The oil-rig builder will focus on building more offshore production units and looks for opportunities in gas storage tanks, Chief Financial Officer Tan Cheng Tat said.

Sete Brasil

Reporting no significant development since Sete Brasil Participacoes SA filing for judicial restructuring in April, Sembcorp said it will continue to engage with the company.

The Brazilian firm fell into financial difficulty after it was unable to secure long-term financing and its only client, state-run oil producer Petroleo Brasileiro SA, known as Petrobras, faced allegations of kickbacks. Sete Brasil accounts for a combined $10.5 billion in orders for semi-submersibles and drill ships at Keppel and Sembcorp Marine.

The investigations into the scandal have wiped out nearly half of Brazil’s naval industry jobs in the past two years, leaving companies bankrupt and creditors unpaid. Keppel and Sembcorp Marine have yards in that country to cater to demand.

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