The wind energy market, which has been on the radar of investors, was hit in recent weeks due to a stream of bad news. These range from industry players abandoning projects and plunging earnings to over-bullish assumptions about public subsidies for funding energy transition projects.
For years, the former Sembcorp Marine was a key player in building oil rigs. Under new CEO Chris Ong, Seatrium, which includes former rival Keppel’s offshore unit, ventured beyond fossil fuel to energy transition projects, which now account for 40% of its $17.7 billion order book.
In its 3QFY2023 ended September business update on Nov 8, Ong maintains that much of the negative news was related to the development of wind energy along the US East Coast that started about two years ago. Due to inflation and rising funding costs, some of these projects are no longer viable. although offtake rates have stayed the same.
At the briefing, Ong stressed that Seatrium’s contracts are “cash flow neutral” where the company is paid progressively based on work done. “Those are going on, relatively smoothly and riding on customers’ ambitions ... The pipeline is pretty strong,” says Ong, referring to the various ongoing renewable energy-related projects.
Seatrium’s shares, having hit a recent peak of 15 cents in early September, have since dropped by around a quarter to close at xx cents on Nov 15. Ho Pei Hwa of DBS Group Research remains optimistic about Seatrium’s prospects, calling the pullback a buying opportunity.
“Earnings turnaround are intact and order wins outlook remains buoyant from both oil and gas and renewable markets,” says Ho in her Nov 8 note. She has kept her “buy” call and 18 cents target price on the stock.
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With oil prices recovering from the 2016 lows and producers stepping up exploration and production, Seatrium is enjoying a different climate “after so many years of cold winter”. According to Ong, there are active enquiries for reactivation of existing rigs not in use, and also upgrades and repairs. However, he warns that new orders will take some time, although industry utilisation has increased to an all-time high. “There are some enquiries but I don’t think at the volume that we saw a decade ago,” says Ong, referring to the industry’s peak era.
Meanwhile, Seatrium is one of the two contractors in the final running for two potential contracts of $4 billion each to build the P84 and P85 rigs for Petrobras. Seatrium is currently engaged in “technical clarification” and the next stage will be price negotiation. Ong admits the process has taken longer than expected due to the complexity of the contracts although it is “progressing well”.
In the 3QFY2023 business update on Nov 8, Seatrium announced it has delivered eight projects year to date while another 33 are in the pipeline till 2030. It has also received a $968 million prepayment in receivables due from Borr Drilling, two years ahead of its due date in 2025.
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Coupled with progressive project deliveries and proactive capital management such as winning $1.6 billion worth of sustainability-linked bonds to refinance earlier debt, Seatrium has reduced its net gearing ratio to 0.15x as at Sept 30 from 0.17x as at June 30. Seatrium expects operational and financial performance to continue to improve in 4QFY2023 although it expects to remain in the red in FY2023.
In her Nov 8 note, Lim Siew Khee of CGS-CIMB Research expects Seatrium to post a “strong turnaround in profitability” in FY2024. She reiterates her “add” call and 19 cents target price, based on 1.5x FY2024 book value, which was the average trading range from January 2015 to May.
Similarly, Adrian Loh of UOB KayHian likes Seatrium too, keeping his “buy” call and 19 cents target price. At just 0.9x FY2024 book value, Loh believes that Seatrium’s valuation remains inexpensive for a company that is enjoying an offshore energy and energy transition upcycle. “Steady as she goes,” quips Loh.
Ong aims to complete a thorough strategic review of the merged company by the end of the year. “There’s been lots of hard work integrating the two organisations and cost structure and execution are definitely at the top of the agenda. We have been executing our projects and are very proactive at our capital management. Once we can deliver our projects in good shape, that creates confidence around customers. As we continue to win more contracts, that will help us drive margin recovery over time,” he says.
