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Machinery & Industrial Equipment

Sembcorp keeps faith with marine arm despite turbulence

Latest casualty in Singapore's offshore industry could hurt Keppel Corp

SINGAPORE (Nikkei Markets) -- Sembcorp Industries, which is trying to cut its debt, justified its decision to provide an additional $1.45 billion in funding to its marine unit by saying the oil and gas exploration industry would eventually turn around.

Neil McGregor, the conglomerate's chief executive officer, said that while the offshore and marine industry faces structural issues such as the emergence of shale that has reduced demand for the rigs and other specialty vessels produced by unit Sembcorp Marine, overall demand for oil continues to increase while current oilfields are being depleted.

McGregor was speaking at a briefing a day after Sembcorp reported a 20% rise in second quarter net profit to 98 million Singapore dollars ($70.7 million), driven by higher earnings from its power generation businesses.

Sembcorp's biggest shareholder is Singapore state investor Temasek Holdings while Sembcorp Marine has a separate listing on the Singapore Exchange.

"There is a change in the business model coming through," McGregor said, referring to the marine arm. "The business is no longer profitable on the rigs side. But floaters and platforms are very much bespoke developments, and there are only a couple of players in the world that can develop these," he added.

Sembcorp Marine has diversified into producing vessels and other structures used to set up offshore wind farms.

However, the statement accompanying the earnings warned that Sembcorp Marine's losses would likely increase in the second half due to a lack of new orders in recent quarters.

The conglomerate recently extended a S$2-billion five-year subordinated loan facility to its marine unit to shore up the latter's finances as it battled the industry-wide downturn.

Singapore's large offshore and marine industry, which covers rig building, ship repairing and various services for oil companies, has continued to struggle despite the recovery in oil prices over the past two years.

Just hours after Sembcorp announced its earnings, oil-and-gas production and development company KrisEnergy sought court protection from its creditors to whom it owed some $477 million. Keppel Corp, whose offshore and marine unit is the largest in Singapore and which has an indirect interest in KrisEnergy, could be liable for up to $179 million of the debt due to a separate agreement with a unit of DBS Group Holdings.

Given Sembcorp's net debt of S$8.7 billion as of end June, its decision to come to the rescue of its marine unit raised some concerns. The conglomerate's interest cover, which measures how many times a company can cover current interest payment with available earnings, is a relatively low 2.4 times.

"Though (Sembcorp's) energy and urban development segments are operating well, the marine segment may pose a greater than expected drag on the group," OCBC Investment Research said in a note.

Daiwa Capital Markets said that the risk associated with a further cash call by Sembcorp Marine could not be ignored.

At the briefing, Graham Cockroft, Sembcorp's group chief financial officer, said the company remained committed to paring its debt.

"The balance sheet is more stressed than we'd like," he said.

--Kevin Lim

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