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SembMarine may turn in operating profits in 2019 as work ramps up

The Business Times by TAN HWEE HWEE

Singapore

NOW that a large chunk of projects on Sembcorp Marine's multi-billion-dollar order book is under construction, its management is optimistic that the large-cap offshore and marine group may turn profitable at the operating level next year.

President and chief executive, Wong Weng Sun, in an exclusive interview with The Business Times, flagged one positive sign: that is, the group's operating losses have been "trending down". "There is a chance next year that operating margins may turn positive," he added.

SembMarine, which operates the largest yard in Singapore, first slipped into the red with an operating loss in the second quarter, but it has narrowed this deficit by more than half in Q3. The group had guided that it expects to post another loss for Q4 due to lower business volume though things appear to be looking up.

It has now at least four projects awarded by Equinor, Shell, Transocean and Heerema Offshore Services, that are either undergoing construction or commissioning. Coming with stringent requirements and challenging delivery schedules, these projects carry a combined value of about US$3 billion, based on analyst estimates. Thankfully, as Mr Wong suggested, SembMarine had already invested in the required capabilities.

The group had already forked out S$1.8 billion as of Nov 26, to develop the mega Tuas Boulevard Yard (TBY), where these projects are being carried out. Facilities earmarked under the first two phases of the mega yard development have entered into operations while a decision was made to slow down the third development phase after a collapse in oil prices sparked off a multi-year O&M downturn.

There's no turning back the clock on TBY and as Mr Wong maintained, the management has no regrets in pressing on with the massive yard investment.

"One proposal we put forth to our shareholders back then was that we should build capabilities during the downturn. Besides, the TBY yard has enabled us to win jobs we could not perform in the past."

Using robotic welding at TBY's new workshop, SembMarine has embarked on steel work on three contracted projects - the production structures for Johan Castberg and Vito, and at least one of two Espadon drillships at the time of this interview. This is a notable achievement because even the most experienced yard operators have struggled to deploy the same machinery and labourers across overlapping projects.

The yard group was also commissioning Heerema's semi-submersible crane vessel, Sleipner, at TBY's newly erected dryock. This is another record-breaking feat for a Singapore-based yard, given Sleipner is the largest semisub of its kind.

Heerema and Transocean as respective owners of Sleipner and Espadon drillships, have decided to push out the delivery dates for these projects. So by and large, SembMarine looks set to beat the odds - as sceptics put it - to deliver all four mega-projects within the agreed timelines.

Leaning on the automated processes in TBY, SembMarine has already completed in May the construction of the world's first newbuild floating storage vessel equipped with a hull of 40-year lifespan.

Mr Wong noted that none of these would be possible if SembMarine did not pursue TBY development and its clients had not bought into the proposition of the new facilities being ready in time for the projects.

The management took the plunge because they foresaw back in 2009, the group had to "diversify its business portfolio and scale up the value chain". One question that they had sought to answer was - what's next for Singapore's O&M sector beyond delivering the best drilling equipment?

SembMarine is at least halfway there in tackling that challenge - it has scaled up the value chain and taken on the more complex engineering, procurement and construction projects instead of plain fabrication work. This move, however, has called upon the group to high-grade its engineering capabilities.

While the sector is not out of the woods yet, the group started hiring again, but for specific skill sets such as design and conceptual engineering that are needed to bid and execute EPC projects. It has also absorbed talents through buying and acquiring engineering-focused outfits including London-based LMG Marin, the architect behind the Espadon drillship design. Its engineering staff strength has rebounded to 900, though that is still down from a 1,000-strong force before the present downturn.

As a matter of fact, Mr Wong pointed out that the added engineering muscle would bolster SembMarine's chances at landing contracts because it can offer designs and solutions to help clients improve their project economics. This is a timely move, considering a new normal is emerging in the upstream oil and gas (O&G) industry that has anchored O&M order books - oil companies as top-feeders of the value chain, are targeting hurdle rates of as low as US$30 per-barrel oil prices for new projects. That's down from pre-crash levels ranging from US$40 and above.

Simply put, Mr Wong said: "The biggest issue facing the industry is how to trim unwanted fats and wastage that were affordable only with high oil prices." Yet, the reality is the last upswing had attracted newcomers into the fray, now offering clients the luxury of going with the best bargains from an enlarged pool of contractors.

Against this backdrop, Mr Wong acknowledged that - as analysts previously suggested - yard margins from upstream projects may at best hover in the single-digit range for some time to come. But, he also noted several positive developments in the upstream O&G space. Take Brazil, the host country to some of the world's largest oilfields. The country has ushered in a new government on concluding its recently held elections. Many in the industry are hopeful that this may herald more pro-business policies.

"The last 13 to 16 months have seen oil majors starting to invest in Brazil once again. That could spell more activities (and contracting opportunities) in the next two to three years," he said.

One other piece of good news is Sete Brasil, a rig-owning unit of Petrobras, now looks set to emerge from bankruptcy and proceed with completing the construction of four out of a combined total of 13 ultra-deepwater drilling units contracted with SembMarine and its rival yard group here, Keppel O&M. This could remove a multi-year overhang on the Sete Brasil rig-building contracts awarded to the two groups.

In light of this, Mr Wong maintained that the S$329 million provision SembMarine has set aside for its Sete Brasil exposure is still adequate. He declined comment when probed for updates on the charges previously announced against an individual for alleged illegal payments linked to these Sete Brasil contracts awarded to SembMarine.

OCBC Investment analyst Low Pei Han said that looking beyond the Q3 operating loss, SembMarine's bottomline may see significant improvement if and when it secures new contracts the market has been waiting for.

"It remains unclear what the margins would be for these new orders; however, the automated TBY may result in cost-savings which could justify (even more competitive) bidding prices.

"The new normal for margins should be apparent when the group starts profit recognition of the new contracts when they are being constructed," she added.

Ms Low urged investors to take "a long-term view" with SembMarine. Backed by its parent group, Sembcorp Industries, the yard group has invested for a long-haul ride in the O&M sector. "It will be well-placed to benefit from a recovery in the offshore O&G sector when it comes."

SembMarine closed at S$1.73 on Monday, up 13 Singapore cents.