Sembcorp Marine Ltd (SGX: S51), or SMM, is still reeling from the oil price crash in 2020 and the effects of the pandemic.
The oil rig specialist had announced its second rights issue in as many years last August as it sought to shore up its balance sheet.
The group recently released its fiscal 2021 (FY2021) earnings and it wasn’t a pretty picture.
SMM reported a S$1.2 billion net loss, double of what it incurred in FY2020.
At the same time, news of a potential sanction on Russian crude oil has pushed oil prices briefly past US$130 per barrel.
Analysts from Bank of America estimated that the world may face a shortfall of five million barrels if this happens.
As a result, oil prices could then soar to US$200 per barrel, a level unseen thus far, analysts said.
Amid this development, could SMM see better days ahead?
A combination of challenges
For FY2021, SMM reported a 23.3% year on year increase in revenue as the group completed a slew of projects.
However, continued supply chain constraints led to cost overruns, while the shortage of skilled labour also severely affected project completion timelines.
As a result, the cost of executing these projects ballooned and their scheduled completion dates were pushed back.
Provisions totalling S$839 million were recorded, pushing the group into a gross loss position for FY2021.
If all provisions were excluded, net loss would be S$332 million, 24% lower than the S$439 million loss incurred in FY2020.
Bright spots
Although the headline numbers look bad, there were several bright spots in SMM’s earnings report.
For one, none of the group’s existing projects was cancelled in FY2021, demonstrating clients’ confidence in SMM’s ability to deliver.
Meanwhile, SMM managed to secure slightly over S$1 billion in new contracts last year.
With these new contracts, the group finished off FY2021 with a healthy net order book of S$1.3 billion, of which 43% comprised renewables and green projects.
Meanwhile, SMM has also booked in provision for costs to complete its FY2021 projects last year and is on track to conclude negotiations on project completion terms with key customers.
Because of the above, the group believes that its financial performance this year should be “significantly better” than last year.
A potential uplift in fortunes
The oil price surge will have an impact on SMM’s order flow.
Oil and gas companies, seeing the uptrend in prices, will be spurred to review their plans for the resumption of deferred activities.
These include decisions on investments in drilling along with capital expenditures associated with increased activity.
As oil majors start to awaken from slumber, the increased economic activity will grease the wheels of SMM’s business and help increase their order book visibility.
Aside from fossil fuels, SMM is also seeing more opportunities and better prospects in the clean energy and sustainable solutions arena.
The group is actively pursuing tenders in the renewable energy and gas solutions segment, and SMM enjoyed recognition with a Singapore International Maritime Award 2021 for its commitment to sustainability.
Moreover, investors should remember that Keppel Corporation Limited (SGX: BN4) is also exploring a potential combination with SMM.
SMM is working with Keppel to ink a definitive agreement by the end of the first quarter.
Get Smart: Effects take time to flow through
The outlook seems bright for the group after it went through two harsh years of steep losses.
With economic activity picking up and the oil and gas industry seeing a resurgence in oil prices, SMM looks poised to do better.
However, investors should be aware that it takes time for the effects of higher oil prices to trickle down to contract wins for the group.
Patience is needed as oil majors need time to reassess their capital commitments and obtain approval for capital spending.
SMM’s fortunes look better this year compared to last year.
But it may take a while before the oil and gas specialist can go back to its glory days again.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
