SembMarine, Cosco buffeted by S$1 billion in combined Q4 losses

Keppel Corp, with property interests, less shaken by oil-price crash; the 3 local banks also affected


THE strain of low oil prices on the offshore and marine sector was in full display on Monday, as two heavily-exposed Singapore-listed companies reported a combined S$1 billion in fourth-quarter losses.

Rigbuilder Sembcorp Marine and shipyard Cosco Corporation (Singapore) reported losses of S$537 million and S$484 million respectively for the three months ended Dec 31, 2015. These were their worst showings in history, according to Bloomberg data going back to 1990.

The losses were partly the result of the reversal of profits already recognised for the construction of oil rigs and ships that might now never be delivered.

Bad-debt allowances, inventory write-downs and customer requests to defer or cancel projects also hit the bottom line.

Significant impairments were made on contracts due to or payments owed by Brazillian customers.

Sembcorp Marine made a S$329 million provision for Sete Brasil projects, joining fellow rigbuilder Keppel Corp, which made a similar S$230 million provision in its fourth-quarter results announced last month.

Sete Brasil is a private company set up in 2010 to build, own and lease deepwater rigs to state-run oil producer Petrobras. But Sete ran into financing difficulties in 2014, after it was caught up in a corruption scandal involving Petrobras executives, Brazillian politicians and a number of other construction and engineering companies supplying Petrobras.

Cosco impaired S$305 million worth of receivables owed, mainly on construction contracts "for certain Brazilian customers with uncertainties in their project status".

The huge losses suffered by Sembcorp Marine and Cosco shareholders can be traced to the impact of the 2014-15 oil price crash. Oil fell from over US$110 a barrel in mid-2014 to US$30 today.

The impact of plummeting prices had rippled across the sizeable oil industry. Oil majors that had engaged costly rigs to drill for oil in remote locations were forced to cut spending and jobs.

Asset owners that had borrowed too much to fund their purchases ran into cashflow problems as charter rates declined. The asset owners had also relied on their suppliers - such as Sembcorp Marine, Keppel and Cosco - to finance them.

Competition forced suppliers to offer more and more lenient payment terms, in that 80 per cent or more of an asset's purchase price did not need to be paid until delivery. Singapore's other major rigbuilder, Keppel Corp, was not as badly hit as Sembcorp Marine because of its significant property arm. It reported a fourth-quarter profit of S$405 million and full-year profit of S$1.5 billion.

But its offshore and marine segment has also been under pressure, reporting a pre-tax profit of just S$21 million, down 94 per cent from S$357 million a year ago.

The three local banks, which financed the oil-and-gas sector, also took a hit. They are expected to report quarterly results this week and the next, with United Overseas Bank on Tuesday, OCBC Bank on Wednesday, and DBS Group next Monday.

Kelvin Tay, regional chief investment officer at UBS Wealth Management, told The Business Times on Monday evening that oil prices are key to determining whether offshore-related write-offs will get worse.

"We expect oil prices to rebound in the second half to between US$35 and US$40 a barrel. If they don't rebound, then I'm sure we'll see a lot (more write-offs)," he said.

An offshore and marine analyst who declined to be named told BT that the large losses for Cosco and Sembcorp Marine do not come as a surprise, as analysts have been warning about the significant amount of uncollectable receivables for some time.

"Cosco is in a more dire situation. Next up would be asset impairments when yard utilisation tanks," he said.

UBS's Mr Tay, however, sees no systemic risk for Singapore banks, which he said are oversold.

The property sector is more important in causing non-performing loans to spike, and not all oil-and-gas players are suffering, he said.


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