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SHARES in Sembcorp Marine lost ground on Wednesday on market fears that a developing legal spat with customer Marco Polo Marine over a US$214.3 million jack-up contract undertaken by PPL Shipyard could hit its bottom line.
The stock was trading at an intraday low of S$2.17 before closing down five Singapore cents or 2.22 per cent at S$2.20. Not helping was a broad market fall.
The contract is set for cancellation with either parties calling for its termination, citing contractual breaches. An RHB Bank analyst note projects that the contract termination with SembMarine's 85-per cent-owned PPL Shipyard would result in a S$35-40 million profit reversal in SembMarine's Q4. "This prompts us to lower FY15F earnings by 9%," said RHB. SembMarine said in a Nov 18 announcement that Marco Polo's unilateral contract cancellation is "a repudiatory breach of contract".
The company also said that PPL Shipyard "disagrees with the allegations" in Marco Polo's stock exchange statement and "will terminate the contract and claim amounts" due against Marco Polo and its drilling unit.
Marco Polo has alleged that cracks were detected on three legs of the jack-up rig being built at PPL Shipyard during two separate tests.
The RHB research report noted SembMarine "did not deny that cracks existed on the rig's legs" even as it disputed Marco Polo's said allegations.
"Important details - such as the number, severity, exact locations of the cracks and whether the classification societies have had a chance to perform non-destructive testing to verify structural integrity - have not emerged," the report said.
Sources speaking to The Business Times on the condition of anonymity said that the tests - understood to have taken place under full pre-load conditions - on Marco Polo's rig were performed to assess the integrity of its legs and jacking system, which are critical to the safety of its eventual offshore drilling operations.
The PPL400 design jack-up would have marked Marco Polo's entry into the offshore drilling business, as a now offshore support vessel-focused player. The aspiring jack-up rig owner's unilateral call for contract cancellation came as day rates for the offshore drilling asset class fell 30 per cent on the back of a 50 per cent drop in oil prices compared to 2014 levels, prompting industry sources to question if Marco Polo was seeking early release from the rig deal with PPL.
A Marco Polo spokeswoman maintained, however, that PPL was granted the opportunity to remedy the cracks spotted in the legs after the first test was performed, but more cracks were found after the second test. These were severe enough to give Marco Polo great concerns and had prompted the call for unilateral contract cancellation.
Marco Polo is seeking a refund of the 10 per cent deposit, or US$21.4 million placed with PPL for the jack-up rig construction. A second 10 per cent instalment originally due in February 2015 has been deferred on mutual consent as a result of a sectorial weakness, said the spokeswoman.
"Marco Polo has since lined up funding options and would have been in the position to make payment when it is due," she said. The company had also received in-principle understanding from a potential investor to co-own and co-operate the jack-up rig, she added.
Marco Polo's jack-up rig was being built to the same PPL400 design as several other jack-up rigs that PPL has already delivered to Oro Negro and Japan Drilling Company. Oro Negro has three further jack-ups and Japan Drilling Company has one further unit being built at PPL to the same design.
Marco Polo's shares closed at S$0.194, down 1.6 cents. The stock was trading at a low of S$0.162, just one hour before trading closed.
The jack-up rig contract value and the reported first 10 per cent deposit paid by Marco Polo Marine are wrongly stated in Singapore dollars. They should have been in US dollars. We apologise for the error.