SINGAPORE (Oct 22): Sembcorp Marine says that its wholly-owned subsidiary, Sembcorp Marine Rigs & Floaters, has signed an agreement with Varg, a wholly-owned company of Teekay Offshore Partners, for engineering, procurement and construction works related to the modification, repair and life extension of the Petrojarl Varg FPSO.

The contract, once finalised, is expected to be worth about US$166 million ($229 million).

According to the agreement, SembMarine’s work scope includes detailed engineering, fabrication, installation and integration of the topside process skid; overhauling of existing internal turret and power generation; and repair and life extension of the vessel’s hull, tanks and various systems onboard.

This is scheduled to be completed in July 2020.

After completion, the Petrojarl Varg FPSO will be operated by Alpha Petroleum Resources for deployment at the Cheviot field development and the Peel satellite accumulation.

This agreement is still subject to Alpha Petroleum Resources finalising their debt facilities with a consortium of lenders and the approval by relevant authorities of Alpha Petroleum Resources’ final field development plan for the Cheviot Field.

The group expects positive contribution to its earnings from the contract. But this contract is not expected to have any material impact on FY18 earnings.

Following this announcement, UOB Kay Hian is maintaining its "hold" recommendation on Sembcorp Marine with a target price of $1.83. 

In a Monday brief, analyst Foo Zhi Wei says, "This still falls short of our $2 billion contract win assumption for 2018. With the year ending, any contract win later in this year is likely to start contributing in 2019 onwards."

Meanwhile, the industry outlook is imrpoving, but the analyst does not see it improving materially enough to drive a sustantial earnings turnaround. 

"Higher capex spending from the E&P majors could translate into more orders, but we envision the margins to remain thin and below pre-crisis levels," adds Foo. 

As at 10.40am, shares in Sembcorp Marine are trading at $1.87 or 1.7 times FY19 book.