Sembcorp Marine

Sembcorp Marine (SMM): According to a recent article from Upstream, SMM's yard in Brazil, Estaleiro Jurong Aracruz, may be on the verge of losing the modules construction and integration contracts for the P-68 and P-71 FPSOs to Keppel. These contracts were secured in Aug'12 at a total value worth US$674m. The article highlighted that the project has failed to gain momentum and SMM is also facing delays with environmental permitting and problems on detailed engineering for the FPSO modules. Problems are so serious that Petrobras is considering cancelling the integration contract and moving the work elsewhere, citing that the company has made approaches to Keppel Offshore & Marine and has been looking at the feasibility of diverting both integration jobs to Keppel's BrasFELS yard. DB maintains its negative view on SMM and feel the FPSO-related issues adds to SMM's risk-list. Overall, house feel downside risks to SMM’s 2015 earnings are real due: 1) Potential liquidated damages if the first drillship is delivered late to the customer; 2) Possibility for associated costs to rise in the delivery run-up as processes are accelerated and/or due to last minute outsourcing work; 3) Potential liquidated damages if the rig does not achieve the local content requirements.