Keppel Corp., the world’s biggest builder of oil rigs, said it stopped work in the fourth quarter on projects for a Brazilian client that is more than a year behind on its bills, and took a S$230 million ($160 million) charge on the delinquent projects.
Sete Brasil Participacoes SA, Keppel’s Brazilian client, is set to discuss later Thursday whether the company, which is also embroiled in a corruption probe, should file for bankruptcy protection after plunging oil prices dented demand for its drilling equipment. Construction work on four semi-submersibles ordered by Sete Brasil progressed by less than 4 percent per quarter last year, Singapore-based Keppel said in a statement Thursday.
“Keppel, being one of the earliest Singapore companies to enter the Brazilian market, has not been spared from this storm,” Chief Executive Officer Loh Chin Hua said Thursday. “We had taken steps to mitigate our exposure by slowing the construction of Sete’s rigs after payments from our customer ceased over a year ago.”
Keppel Thursday reported that fourth-quarter profit fell to S$405 million from S$726 million, as several projects expected to deliver in 2015 were pushed back to this year. Still, that beat the S$392 million average profit forecast in a Bloomberg survey of five analysts.
Keppel and rival Sembcorp Marine Ltd. face the risk of clients asking for further delivery delays and cancellations, and of new orders drying up, as oil prices have fallen below $30 a barrel for the first time in more than a decade. Shareholders of key customer Sete Brasilare set to discuss later Thursday whether the Brazilian company, which is also embroiled in a corruption probe, should file for bankruptcy protection after plunging oil prices dented demand for its drilling equipment.
Brazilian Troubles
Sete Brasil hasn’t paid Keppel and Sembcorp Marine since November 2014, putting at risk $10.5 billion of orders placed with the two companies. The Brazilian company ordered six semi- submersibles from Keppel and seven drillships from Sembcorp Marine in 2011 and 2012, about 40 percent of the two companies’ orderbooks, according to Nomura Holdings Inc. and DBS Vickers Securities.
Sete Brasil fell into financial distress after it was unable to secure long-term financing amid allegations of kickbacks to its only client, state-run oil producer Petroleo Brasileiro SA, or Petrobras. Creditors have repeatedly rolled over Sete Brasil’s loans since October 2014 to help it stay afloat, according to people familiar with the matter.
Keppel has already recognized about $1.3 billion in revenue from the orders, Loh said Thursday, while DBS Vickers said in a Jan. 11 report that Sembcorp Marine has recorded around S$2.5 billion. If Sete Brasil files for bankruptcy, the Singaporean rig builders probably will need to revise their revenues and take impairment charges, DBS Vickers said.
Slow Motion
Loh noted the difficult macro environment facing Keppel, with oil prices and the Chinese stock market falling. He dwelt at length on the situation with Sete, saying Keppel had drastically slowed work on Sete’s projects last year, and stopped it entirely by the end of the year.
“We understand that Sete’s board will soon be meeting to discuss future plans for the company,” Loh said. “It remains unclear when a final decision will be taken. Until we hear from Sete officially and the situation and options available to us become clearer, the above measures, in our opinion, are sound and adequate.”