Seatrium Limited (formerly SembCorp Marine and KOM)

[weijian]

hi valuebuddies,

I have slightly different thoughts. I think the Market is already pricing in this mistake of "phasing out fossil fuels just too quickly" accordingly. Just look at the prices of the oil majors like Shell and BP for the last 2 years, their market capitalization have increased by ~50-80%.

At this same period, the market price of Sembmarine has gotten much worst off (with a large portion attributed to the rights issues of the past 2 years).

1. The opportunity: Sembmarine's competency in rigs, is at deepwater (and upstream) portion of the O&G market. This will probably be 1 of the last beneficiaries and hence any O&G boom needs to be long and substantial for Sembmarine to benefit.

2. The risk: As an OPMI, something feels wrong. If they need to have huge write downs on their projects even before they are completed (as explained by VB yoyo here on 1H21 results: https://www.valuebuddies.com/thread-1795...#pid162654), this is a red flag on their execution capabilities. I do have a friend working as an O&G subcontractor and his comments on Sembmarine are not good. But then again, that is just a single anecdotal sample point which I wouldn't put too much weight on. With the pending Keppel FELS's integration to Sembmarine's network, I think the House of Sembmarine, which I suspect is in chaos, will only get worst.

3. The opportunity cost: Sembmarine's friendliness isn't a choice they could make. Transocean's contract with Sembmarine is basically a case of "Heads I win, tails I dont lose" situation. Most of the upside embedded in the contract is with Transocean and is their option to exercise.

I do not deny that there could be opportunities for Sembmarine. But I suspect Sembmarine isn't the "alpha stock" as it used to be in the early 2010s after looking at the risks/opportunity costs.

[valuebuddies]

Hi Weijian

Historically SGX companies have been lagging and uninteresting, it is not surprise that investors have not been paying much attention to the potential SembMarine. Well unlikely SembMarine will go back to $2-$3 because of the rights issue, but getting from 8c to 40c (without share consolidation) is possible in my opinion.

Why I think $100 oil per barrel is surprising, if we look at other fossil fuels, Newcastle coal is presently at $239 which is almost double of the previous high of $140 in 2011, Dutch TTF is currently at $118 which is almost 5-times of what it used to be 10 years ago, JKM gas price is currently at $39 which is double of the previous high of $20 in 2014. Whereas for oil, the price we are seeing today is still far from $140 it used to be in 2008.

I agree that "O&G boom needs to be long and substantial for Sembmarine to benefit", but considering that oil price is at 7 years high now, isn't it substantial enough for SembMarine to start reaping some benefits? Or is it not obvious that the current O&G boom is going to be a long and substantial cycle?

Projects impairments are inevitable for a company who rely so much on foreign labour, due to the pandemic and thanks to the way how our government handle the Covid situation. But Singapore O&G sector is likely seeing lights at the end of the tunnel with Keppel announcement of much better results for its O&M arms as well as news of contracts winning. And I believe that the merger between Keppel O&M and SembMarine will benefit SembMarine being able to monopolize the rigs building sector in Singapore.

Well I have no issue for SembMarine for extending financing to its customers as long as they dont turn back to the shareholders for more monies. Anyway I don't expect SembMarine to call for another round of rights issue. Results will be out today, we shall see by then.

[CY09]

SCM depends still hugely on shallow water and deepwater rig orders. However, oil majors/rig owners till now doesn't seem interested to sign new contracts with them.

West Africa, South East Asia and Mexico still have a significant amount of rigs that are in warm/cold stacked according to IHS markit data. In humans sense, there is still widespread unemployment of rigs. Before creating new 'humans' (rig orders), the industry still has to find jobs for the unemployed and currently there are no jobs available for them.

[valuebuddies]

Yes no new contract for deepwater rig builder, but there are new drilling/leasing contracts, even before the delivery of these deepwater drillships.

https://www.oedigital.com/news/494372-tr...-singapore

[CY09]

Yep i saw this news. Do note Deepwater Titan was ordered in 2014, and supposedly was for delivery in 2018. Transocean keep delaying the delivery with new modifications and variations until 2022 and coincided with its securing a contract. Transocean has a remaining deepwater rig order with SCM which it is trying to defer because it has not secured a contract. As of date, Transocean has more than 12 rigs that are unemployed

https://www.deepwater.com/documents/Flee...202022.pdf

Borr Drilling is another, but with Keppel O&M. The company has been deferring the delivery of 5 shallow water rigs and Keppel has to warm stack it and keep it as it is not officially handed over to Borr. They were supposedly completed in 2020/2021. Similarly, Borr had took delivery of 5 older batches of shallow water rigs from Keppel and they are unemployed.

https://borrdrilling.com/wp-content/uplo...88ad38.pdf

These to me are the barometers of when orders will flow in to SCM

[valuebuddies]

Hi CY09

And from here we see that the O&M is getting lively again!

[weijian]

Hi Weijian

Historically SGX companies have been lagging and uninteresting, it is not surprise that investors have not been paying much attention to the potential SembMarine. Well unlikely SembMarine will go back to $2-$3 because of the rights issue, but getting from 8c to 40c (without share consolidation) is possible in my opinion.

Why I think $100 oil per barrel is surprising, if we look at other fossil fuels, Newcastle coal is presently at $239 which is almost double of the previous high of $140 in 2011, Dutch TTF is currently at $118 which is almost 5-times of what it used to be 10 years ago, JKM gas price is currently at $39 which is double of the previous high of $20 in 2014. Whereas for oil, the price we are seeing today is still far from $140 it used to be in 2008.

I agree that "O&G boom needs to be long and substantial for Sembmarine to benefit", but considering that oil price is at 7 years high now, isn't it substantial enough for SembMarine to start reaping some benefits? Or is it not obvious that the current O&G boom is going to be a long and substantial cycle?

Projects impairments are inevitable for a company who rely so much on foreign labour, due to the pandemic and thanks to the way how our government handle the Covid situation. But Singapore O&G sector is likely seeing lights at the end of the tunnel with Keppel announcement of much better results for its O&M arms as well as news of contracts winning. And I believe that the merger between Keppel O&M and SembMarine will benefit SembMarine being able to monopolize the rigs building sector in Singapore.

Well I have no issue for SembMarine for extending financing to its customers as long as they dont turn back to the shareholders for more monies. Anyway I don't expect SembMarine to call for another round of rights issue. Results will be out today, we shall see by then.

hi valuebuddies,

1. We have to be careful about trying to attribute the "unpopularity" of Sembmarine to its listing venue. It sounds convenient but upon scrutiny, may not be so. The Singapore Exchange, has its own 10baggers. And more importantly, in its heydays (mid 2000s to early 2010s), both local rig builders were popular and giving great returns to its shareholders. Yes, we have cases of companies that delisted at SGX and then relisted on HKEX on higher valuations when nothing material had changed (eg. Man Wah). But the point I want to make is, a gem that is stuck in the mud will still shine regardless.

2. I am not sure if benchmarking crude oil to different commodities like LNG and coal is really a good apple to apple comparison, even though they are all energy related. All 3 of them have different supply mechanics that is dependent on geography and extraction technology, and also different demand considerations (who is clean, who is not). I do not have good insight to LNG/coal, so that is probably all I can say.

3. Oil used to have "deep and long" cycles but US shale has changed all these because of its relatively low CAPEX and ease of ramping up/down. I believe all players are more guarded moving forward, and that will contribute to the long term stability of the offshore market. But unfortunately, such apprehension isn't exactly good for upstream offshore players (Sembmarine) that are banking on huge new CAPEX to rise from the depths again.

[CY09]

The main offshore & Marine industry has had a bad year in 2021. Keppel O&M reported a loss of 160 million while SCM's had a loss of 320 million (excluding provisions)

https://links.sgx.com/FileOpen/SCM%20FY2...eID=703819

SCM's order book has fallen drastically. For the past 6 months, SCM has only secured two orders and it is not enough to keep yards fully utilized in year 2023. From 2023, SCM could be bleeding losses due to idleness.

A merger between Keppel O&M and SCM is not worth it, two idle yards merging together still means idle. With the world moving towards clean fuel, I dont foresee a drastic increase in rig orders. New offshore wind platforms is a possibility but there are already a large number of yards doing this.

[valuebuddies]

Sembcorp Marine - Moving In The Right Wind Direction
SEMBCORP MARINE LTD (SGX:S51) | SGinvestors.io

Sembcorp Marine announced its first contract for the year, the company’s first wind turbine installation vessel. The vessel is scheduled for delivery in 2025. Given the lead time of construction, we believe the contract is worth US$300- 500mil, based on the latest transactions by Keppel, China and Korean yards.
We believe this project could yield 5-6% EBIT margin as it is Sembcorp Marine (SGX:S51)’s first.
Sembcorp Marine (SGX:S51)'s order book stood at US$1.3bn at end-21 and we project S$2bn order wins for 2022.
Sembcorp Marine's share price could react positively. Reiterate HOLD, target price of S$0.09.



Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.

[weijian]

Such delays reflects an increase in the probability of the merger not happening. Looking back to the June2021 PR, both companies said that the talks would be "expected to take several months". It has been a little more than "several months" according to normal convention. If merger discussion is already so long, what about the subsequent regulatory application/approvals in all the different jurisdictions that they operate in?

'More time and deliberation' needed in potential combination of Keppel O&M, Sembmarine

Giving the update in a bourse filing some 9 months after first announcing talks on potentially combining the entities, the parties said they still need to complete due diligence, reach mutual agreement on the transaction terms and finalise definitive legal documentation.

Both parties have thus committed to continue with exclusive negotiations and work towards a definitive agreement by Apr 30 this year, they noted, adding that "considerable resources" are being devoted to progressing on it.

https://www.businesstimes.com.sg/compani...sembmarine