Seatrium catches a new wave

Immediately upon completing the merger, Seatrium, in its 1QFY2023 business update, announced that it was embarking on a “comprehensive strategic business review to unlock synergies and build a roadmap for sustainable growth”. The exercise was expected to be completed before the end of 2023.

In FY2023 ended Dec 31, 2023, Seatrium reported an ebitda of $236 million, reversing from a negative ebitda of $7 million in FY2022. However, net losses deepened to $1.94 billion from $261.1 million due to a $2 billion impairment mainly for surplus assets. The impairment included a “leniency agreement” costing $182.4 million with the government of Brazil to conclude a long-running corruption probe dubbed Operation Car Wash.

In its FY2023 results announcement on Feb 26, Seatrium revealed that it had written down its surplus and non-core assets after the strategic review to achieve better productivity, optimise operational structure and reduce cash operating expenses.

See also: Electric blue runs in Seatrium's veins

On its March 15 investor day, Seatrium unveiled several targets it wanted to achieve by 2028. These included a consistent ebitda of over $1 billion, a return on equity (ROE) of over 8% and a Net debt ÷ Ebitda of two to three times.

At the briefing with the media, analysts and investors then, Ong noted that the targets were “very, very ambitious”, given that the target ebitda was over four times Seatrium’s FY2023 ebitda.

Although some analysts felt Seatrium was too conservative and that Ong could have been more “aggressive” he tells The Edge Singapore he is “very fortunate” to have won over more analysts to put their faith in the stock.

See also: ASL Marine seeks to exit SGX’s watch-list

According to Bloomberg data, all nine analysts with active coverage of Seatrium have rated it a “buy” or its equivalent. Three of them, Macquarie’s Foo Zhiwei, CLSA’s Low Horng Han and DBS Group Research’s Ho Pei Hwa, are the most bullish among their peers with the same $3 target price. The most conservative is Citi Research’s Luis Hilado, who has a “buy” call with a target price of $2.10.

“I’ll take it that their belief in the business is a fortunate thing because can you imagine if they instead ask, ‘Are you sure you can meet that target?’” says Ong, adding that nothing is preventing him and his team from overachieving those targets. “If you take a step back, more than a year ago, I don’t think [everyone] will be talking like that. Instead, they will ask, ‘Will you make smaller losses?’ But I think Seatrium has done well.”

Seatrium CEO Chris Ong is focused on building a resilient business / Photo: Samuel Isaac Chua of The Edge Singapore

Since taking charge, Ong has made the company more cost-efficient and supportive of its customers. In 1HFY2024, Seatrium reversed into earnings of $34.7 million from $266.9 million in losses a year ago. Revenue rose 39% y-o-y to $4 billion, mainly from progressive revenue recognition from newbuild projects and higher repair and upgrade activity.

Ong is glad to see these “early results” but acknowledges that a more convincing turnaround is still a “work in progress” that he will continue to drive towards the goal.

Noting that his target ebitda was, after all, “more than a billion [dollars]”, Ong says the earnings they have achieved represented “good guidance and visibility” and that at the end of the day, the team is “very focused” on building a resilient business.

To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section

The tide is turning

Ong’s optimism is largely due to better prospects for the industry. Following that prolonged downturn since 2015, the O&M sector is now enjoying a lift from renewed energy demand from both fossil fuels and renewable sources and Seatrium’s engineering expertise is needed to build massive, complicated equipment to extract or generate them. “There is a buzz of activities all over the world,” says Ong.

In its 3QFY2024 business update on Nov 11, Seatrium’s net order book hit $24.4 billion, comprising 30 projects with deliveries until 2031. Since the start of the year, Seatrium has already delivered three projects and completed 192 repairs and upgrades projects.

A big chunk of this order book, $11 billion to be exact, came from Petróleo Brasileiro (Petrobras), Brazil’s national oil company, to build two floating production storage and offloading (FPSO) vessels, P-84 and P-85. Construction will start in 1Q2025, with final delivery expected in 2029.

Ong plans to capture more contracts by using its “second to none” network of yards across various key markets to help it meet customers’ local content requirements. This was the case for P84 and P85, where parts will be built in Singapore, China and Brazil before their final assembly.

Besides trying to win more business, Ong has to keep a constant eye on potential external risks. In the US, he remains “very watchful” of what might happen with president-elect Donald Trump taking office on Jan 20. “Whether there’ll be trade tariffs, whether there’ll be protectionism, we just have to make sure we’re prepared for that,” says Ong, stressing that the US remains a “very important market”. He says Seatrium’s US unit does not operate in isolation and has the support of the entire Seatrium group. “We have the technology, we have the people, and we have the capacity,” he says.

Meanwhile, Seatrium is busy in the US building floating production units (FPUs) for Shell to use in the Gulf of Mexico after securing a contract in January. In June, it won a letter of intent (LOI) to build BP Exploration and Production’s Kaskida FPU, which will operate in the same area.

Even though the changes in the US are making these times “interesting”, Seatrium remains capable of working on whatever sector the new government wants to focus on.

“If the government focuses on oil and gas extraction, we are in FPUs. If it continues to focus on the offshore wind market, our track record will put us in a very good stance, and we have local capacity over there, too,” Ong adds.

According to Ong, Seatrium deals with geopolitical tensions and market cycles by building a diversified business across different industry sub-segments for different customers from different markets.

More legs to stand on

Seatrium has four main business segments. These are oil and gas newbuilds and conversions, offshore renewables, repairs and upgrades, and new energies.

While “oil and gas and others” made up 65% of its net order book, compared to 35% of “renewables, cleaner/green solutions” in 1HFY2024, Ong’s goal is to have a good mix of renewable projects in its portfolio by 2028.

Within the renewables market, Seatrium is eyeing more offshore substations contracts after gaining a solid foothold in the past two years. In five years, Seatrium will be one of the front runners for the floating wind sector, says Ong. “So, again, we will continue to deepen our value proposition for what our customers require.”

After a recent multi-year surge in interest and activity, there is a discernible slowdown in the tempo of investments in the renewables sector due to rising costs of building and installation once having enjoyed generous public subsidies.

Ong points out that every sector faces challenging periods caused by costs and regulations. However, the energy transition will persist, and renewables will remain the fastest-growing sector within the broader energy market. “Our energy mix will inevitably have to include renewables,” he says.

Ong says his job is to ensure that Seatrium can capture its fair share of this growth organically but he is also open to acquisitions. “The reason customers come back to engage us shows we have a presence to deliver to Europe, Taiwan and the US. The [704MW] Revolution Wind [offshore wind farm] for Orsted is now on the way to the US,” he adds, citing an example.

“We go where the market needs that solution. So, I’m not too concerned about the energy mix challenges at the present moment. If we believe that energy demand will continue to grow, that’s the more important trend we should look at.”

Return of the rigs?

In the previous multi-year boom cycle, Keppel and SembMarine were among the top two rig builders in the world, propelling their share prices to record levels. With the prolonged downturn, both companies were forced to restructure, leaving behind a fleet of “legacy rigs” partially built but abandoned when customers couldn’t pay or aborted their contracts when demand vapourised. These unwanted rigs were grouped under an entity dubbed the “RigCo”.

With the offshore rig market improving, Keppel announced on Nov 19 its plans to gain complete control over RigCo via a selective capital reduction exercise. As part of the existing master services agreement with RigCo, Seatrium will continue to provide construction, maintenance and other associated services for the legacy rigs for 10 years after the merger between SembMarine and Keppel O&M.

Ong is careful to temper his excitement, if any. He sees the market for rigs improving but not returning to the big building boom of the heydays. With his more than two decades in this industry, the epic boom and bust cycles are likely something Ong knows he has to navigate deftly. One way is to increase the proportion of revenue from quicker turnaround repairs and upgrades versus longer and “lumpier” projects stretching over several years before revenue could be fully recognised.

“When Seatrium was formed, I’ve always mentioned that the repairs and upgrades business is an important part of the business because we provide a unique proposition to our customers,” he says, adding that over the last one and a half years, Seatrium has been awarded contracts by several big names to undertake such jobs. In any case, Ong stresses that both segments are relevant to how Seatrium aims to grow. “We love both,” he says.

Investigation overhang

Despite the turnaround efforts and bullish target prices, Seatrium’s share price has remained muted since the start of the year. As of Dec 3, it is down 15.25%. Market watchers attribute one possible reason to the series of outstanding legacy legal issues Seatrium has inherited.

On March 28, the company announced that Singapore’s Attorney-General’s Chambers agreed to a US$110 million deferred prosecution agreement over alleged corruption offences in Brazil stemming from its SembMarine days. Just when the market thought Seatrium had washed its hands off Operation Car Wash, as the case in Brazil was called, less than three months later, on June 15, Seatrium announced that the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) were conducting joint investigations for alleged offences by then SembMarine under the Securities and Futures Act. Ong says the latest investigation was a surprise, and he has no further updates to share.

Long-drawn contractual disputes remain a distraction too. On Nov 27, Seatrium said its application to prohibit further payment on the standby letter of credit (SBLC) provided for an old contract was dismissed by the Singapore courts the day before. Seatrium had previously provided a US$126.6 million ($170.3 million) SBLC in favour of the customer repaying the amounts in the SBLC. The customer sought to call on the SBLC in September 2022, and Seatrium obtained an interim injunction to prevent any payment made under the SBLC at the time. According to Ong, the legacy contract was for the P-52, built by Keppel O&M, and happened over a decade ago.

Ong stresses that Seatrium has been transparent in listing all the litigations it has been exposed to and that these cases are “well managed”, although he notes that it is hard to tell when they will all be settled as courts take time to decide.

Resumption of dividends?

Despite its teething problems, Seatrium does not want to detract from its growth ambitions. “Seatrium will be a global name. We are a global name, and we will build a global name with a resilient business and unique proposition for our customers,” says Ong.

But can Seatrium regain the stellar reputation it once enjoyed among shareholders, including those who have held on to their SembMarine shares that have suffered massive dilution through the downturn and restructuring?

As of Dec 3, shares in Seatrium closed at $2, which is equivalent to 10 cents before its 20-for-1 share consolidation on May 8. The price remains at the lower end of the range cited by Seatrium on Feb 26, when it announced that it was proposing a 20-for-1 share consolidation. As of the announcement, Seatrium noted that its shares were trading at a price range of 8.6 cents to 14.6 cents in the past six months. The current share price remains a far cry from its pre-adjusted equivalent all-time high share price of $67.16 in April 2011.

As some analysts expect Seatrium to turn profitable in FY2024 ending December, the next question by shareholders would invariably be when dividends would start flowing again. Ong says he wants to make it happen when the company can do so sustainably. “That is the golden question. One big element of my and the senior management team’s scorecard is shareholders’ total returns. This is my variable [and] I’m measured based on that,” says Ong.