Sembcorp Marine Remains Deeply in the Red: Can the Oil and Gas Giant Orchestrate a Turnaround?

2021-03-02     thesmartinvestor
Sembcorp Marine Remains Deeply in the Red: Can the Oil and Gas Giant Orchestrate a Turnaround?

It has been a tough slog for the oil and gas sector.

The oil price crash in June 2014 saw prices plunging from a high of US$115 per barrel to bottom at US$37 per barrel in early 2016.

And just when it seemed like oil demand was recovering since then, with oil prices hitting US$62 per barrel in December 2019, the pandemic swept in like a tsunami.

This crisis, along with a deluge of oil supply coming from companies with advanced extraction techniques, caused the oil price to plunge to around US$20 per barrel by April 2020.

Not only have oil majors been hit hard, companies that build rigs and floaters and support the offshore and marine industry have also taken a beating.

Keppel Corporation Limited (SGX: BN4) recently made a shock announcement, stating it was exiting the offshore and marine sector to focus on renewable energy.

Sembcorp Marine Ltd (SGX: S51), another major player in the offshore and marine sector, recently released a disastrous set of numbers for its full-year 2020 earnings report.

The fallout in the oil and gas sector caused the marine giant to report its third consecutive year of losses.

As COVID-19 vaccines are being rolled out across the world, can the group see its fortunes changing?

Drowning in red ink

For the fiscal year 2020 (FY 2020), Sembcorp Marine saw its revenue fall 47.6% year on year to S$1.5 billion.

Part of the reason for the drop was due to the group’s yards being shut during Singapore’s circuit breaker period from April to June last year.

The marine giant reported a gross loss of S$490.5 million, up more than five-fold from a year ago.

The gross loss came about from delays in project execution, higher costs incurred for rigs and floaters, and inventories being written off.

To make matters worse, the group had to recognise S$162 million worth of pre-tax asset impairments and provisions in the fourth quarter of 2020.

All these events pushed Sembcorp Marine into a huge net loss of S$582.5 million.

Even when the one-off impairments are excluded, the group still incurred a net loss of S$439 million.

One bright spot is that Sembcorp Marine ended off 2020 with an order book of S$1.82 billion, though a key question arises as to whether the group can recognise profits on these contracts due to the depressed state of the oil and gas sector.

Cushioning the cash burn rate

Due to the persistent losses, Sembcorp Marine has been burning cash over the last three fiscal years.

FY 2018 saw the group end the year with a negative operating cash flow of S$170 million.

FY 2020 and FY 2019 saw this cash burn continuing, with increasingly negative operating cash flow of S$749.9 million and S$269.2 million, respectively.

Needless to say, once capital expenditures were factored in, the cash burn increased.

A lifeline was thrown to Sembcorp Marine last year when its parent, Sembcorp Industries Limited (SGX: U96), announced a major corporate restructuring.

This restructuring involved a demerger of Sembcorp Marine from Sembcorp Industries, along with a rights issue to shore up the marine outfit’s balance sheet.

The resultant cash inflow amounted to around S$587 million but was insufficient to fully cushion the high cash burn rate for the group.

Pivot towards greener energy

At its FY 2020 earnings briefing, CEO Wong Weng Sun outlined Sembcorp Marine’s key business strategies for transforming the business.

The group intends to diversify into cleaner and greener energy solutions, in line with the global shift towards renewable energy sources.

Its current sustainable product solutions cover wind farm installation vessels and LNG vessels, to name a few.

The intention is for the group to shift further up the value chain to take on more complex projects.

These projects will require Sembcorp Marine’s integrated offshore and marine engineering capabilities.

Get Smart: Much more time needed

It looks like the marine giant is safe, at least for now.

The cash infusion from its recent rights issue has provided it with some breathing space as the group navigates the acute challenges facing the oil and gas sector.

Sembcorp Marine is also slowly pivoting towards more sustainable energy solutions to wean off its reliance on the legacy offshore and marine industry.

However, much more time will be needed to see if these initiatives pan out well.

To use an analogy, changing the direction of a huge vessel in the sea will take time.

But time may not be on Sembcorp Marine’s side if the group continues to burn large amounts of cash.

Unfortunately, the CEO painted a grim picture of the future, with pandemic containment measures unlikely to be lifted anytime leading to the continued disruption of global supply chains.

If the group is unable to stem the bleeding soon, it may have to tap on capital markets once again for another cash injection to keep the lights on.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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