Sembcorp Marine

Sembcorp Marine (SMM) has put out a stout defence of its case against Marco Polo Marine (MPM) over wrongful termination of a US$214.3m jack-up rig contract on purported defects just before the delivery date.

To recap, MPM had, on 17 Nov, unilaterally cancelled its jack-up rig contract with SMM on grounds that it found cracks on all the legs of the rig, and sought for a refund for its initial 10% down payment.

SMM revealed that the jack-up rig is 98% completed and in final phase of construction and testing before its contractual delivery date on 30 Nov 2015. Moreover, the contract terms provided an additional 210 days post 30 Nov for the rig to be delivered. As such, SMM argues that it has ample time to rectify any defects that MPM may have on the rig.

Hence, SMM perceives that MPM's notice of termination is wrongful and without justification and meant to avoid obligation to pay the second disbursement of US$21.4m already due under the contract. Indeed, the payment was already deferred twice at the request of MPM previously and is payable by 30 Nov.

In light of the developments, SMM will invite MPM to refer to the dispute to the Classification Society in order to resolve the matter.

Nevertheless, Maybank-KE opines that even if SMM wins the case, MPM would not have the financial capacity to pay for the outstanding amount of $193m, given its weak balance sheet and high net gearing of 0.94x, or unless it manages to secure a charter contract for the rig, which is unlikely in the current environment.

The greater implication of this saga on SMM and other yards is that it could herald other debt stricken rig owners or speculators to find various excuses to break their contracts. This trend may become more intense in 2016 if the oil price downturn continues to last for an extended period.

The house maintains a Sell rating with TP of $1.75 on Sembcorp Marine.