Sembcorp Marine has terminated one contract with Petroprod

Sembcorp Marine has terminated its contract with Petroprod D&P I Ltd for the construction of a jack-up rig, as milestone payments due under the contract have not been received. The jack-up rig is a harsh environment drilling rig and is one of the world’s largest jack-up rigs. SMM says that there are alternative buyers who are interested in this rig, and they are confident that it will be able to receive all amounts it should have earned with the sale of this rig.

The rig was contracted in 2007, is expected to be completed in mid-2010, and has a value of US$442m. Petroprod is a member of Norway’s Larsen Group, and we understand that it is being put in liquidation. We also understand that Petroprod has one other order with SMM, for the conversion of a tanker to an FPSO.

On June 8, SMM had announced that it had sold the semisubmersible PetroRig I to Diamond Offshore in order to recover monies due to them following the non-payment by the customer, Petromena. Petromena similarly has ties to the Larsen Group. Petromena also has two more semi-submersibles under construction with SMM.

This latest development is indicative of our ongoing concerns for potential cancellations and defaults that SMM faces. Although SMM has so far been protected via progress payments and still-buoyant pricing for rigs, the elevated risk is one of the reasons for our muted outlook on the stock. We are keeping tabs on more potential cancellations, and maintain our Hold recommendation to target price of S$2.91.

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