The offshore and marine industry is facing “unprecedented times”, Singapore’s Sembcorp Marine said on Monday, as it responded to further shareholders’ comments and queries relating to its proposed merger with a restructured Keppel Offshore & Marine.
“The O&M sector has faced a prolonged and severe downturn since 2015, exacerbated by the rapid global transition towards renewables and clean energy, as well as significant disruptions during the Covid-19 pandemic,” Sembmarine said.
“While oil prices have rallied in recent months and conditions in the O&M sector are improving, the long-term outlook for the O&M sector will continue to shift amid the energy transition.”
The deal envisages an internal restructuring of Sembmarine whereby all shareholders will transfer all their existing Sembmarine shares to the combined entity on a one-for-one basis. Upon completion of the Sembcorp Marine Scheme, Sembcorp Marine will become a wholly owned subsidiary of the combined entity.
This entity would then merge with a restructured Keppel O&M, which too will ultimately become a wholly owned subsidiary of the combined entity.
Reiterating its rationale behind the proposed merger, Sembmarine on Monday said that since 2015, it has embarked on a strategic business transformation journey.
The contractor added it has too strengthened its core engineering capabilities and aligned its research and development programmes to key market verticals in offshore renewables, new energy, and cleaner solutions for the O&M sector.
“In the last several years, we have also made strategic investments and acquisitions to better position and align our businesses to meet evolving market demands. The proposed combination is a major development in this transformation journey.”
“While the market potential is tremendous, the need for a larger and more robust platform to take advantage of these opportunities cannot be overemphasised. Sembmarine is ready to take a bold step to further augment the depth and breadth of its engineering and operational capabilities through the proposed combination.
“[This] offers the best way forward for us to play a long-term role in meeting the changing needs of our customers in the O&M sector, who themselves need new, cleaner energy solutions.”
Sembmarine highlighted one potential immediate benefit of the touted merger - the optimisation of its larger and newer yards in Singapore and Brazil for the enlarged orderbook of the combined entity, which is expected to result in financial and operating benefits.
“Specifically, the restructured Keppel O&M brings a net order book of S$5.1 billion [US$3.66 billion], which would add to the S$1.3 billion net order book of Sembcorp Marine. The gearing of the combined entity on a pro forma basis is also lower at 22% compared to 33% for Sembmarine on a standalone basis,” the company added.
Radically changed fundamentals
Sembmarine said that if were to continue to fly solo “it would have to navigate an even more competitive landscape where many offshore players have sought consolidation or were otherwise challenged by the radically changed fundamentals of the business and needs of customers”.
Responding to shareholders’ queries as to why Keppel O&M’s related companies Keppel Floatel International and Dyna-Mac are excluded from the proposed merger, Sembmarine noted that both of these contactors were loss-making in 2019 and 2020 and have been deemed “incongruent” to the deal — as have been Keppel O&M’s legacy rigs.
Sembmarine also sought to explain to its shareholders the rationale behind its rights issues in 2020 and last year, describing them as “pre-emptive exercises to strengthen the group’s balance sheet amidst challenging market conditions”, especially with the company posting net losses of S$583 million and S$1.175 billion respectively in the 2020 and 2021 financial years.
“The prolonged disruptions from Covid-19 created near-term challenges for the group and the remaining proceeds of the 2020 Rights Issue were deemed insufficient for the group to ride through the industry downturn and pandemic-led supply chain constraints and impacts.
“A further recapitalisation via the 2021 Rights Issue was critically required to further strengthen our balance sheet, address the temporary working capital depletion and replenish liquidity to meet the projected operational funding requirements through to end 2022.”
The remaining approximate S$720 million from last year’s Rights Issue is to be used for general corporate purposes, including working capital.
Weighing on overall liquidity
“[However], the challenging and competitive global operating environment coupled with additional upward pressure on inflation is likely to weigh on the group’s overall liquidity,” Sembmarine cautioned on Monday.
The Extraordinary General Meeting for Sembmarine shareholders to vote on the proposed tie-up with Keppel O&M is expected to be convened in the fourth quarter of 2022.