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Keppel, Sembcorp Marine in dire straits following Sete Brasil crisis

SINGAPORE — This week, two of Singapore’s blue-chip companies could learn that it does not pay to expand too far afield.

SINGAPORE — This week, two of Singapore’s blue-chip companies could learn that it does not pay to expand too far afield.

Keppel, the world’s largest builder of oil rigs, may post its lowest annual profit in seven years when it reports earnings on Thursday, according to analyst estimates. That same day, shareholders of key customer Sete Brasil Participacoes are set to discuss whether it should file for bankruptcy protection after plunging oil prices slammed demand for drilling equipment at the South American company, which is also embroiled in a corruption probe.

The earnings briefing may shed light on the extent of troubles the Brazilian client poses to Keppel and Sembcorp Marine, the world’s two biggest oil-rig builders, which have not been paid by Sete Brasil since November 2014. Analysts are predicting further profit declines this year for both companies, which have US$10.5 billion (S$15.1 billion) worth of orders for semi-submersibles and drill ships from Sete Brasil at risk of being cancelled, according to a Jan 7 report from Nomura Holdings.

“Brazil is a concern, especially if Sete Brasil goes bust,” said Mr Hugh Young, Singapore-based managing director at Aberdeen Asset Management. “We’re riding this out.”

Aberdeen is Keppel’s third-largest shareholder.

Sembcorp Marine lost 5.1 per cent to close at S$1.315 after falling 6.1 per cent during intraday trading. Keppel dropped 4.1 per cent to S$4.64 before recovering to close up 0.2 per cent at S$4.85. Both stocks reached the lowest intraday prices since 2009. The Straits Times Index receded 1.4 per cent. Keppel has fallen 25 per cent this year through yesterday. Sembcorp Marine is down 25.5 per cent.

“Sete Brasil continues to work to create a viable restructuring plan, with different shareholders currently analysing different strategic scenarios to be pursued,” the company said in an emailed response to Bloomberg.

Keppel and Sembcorp Marine declined to comment ahead of their results.

Keppel will probably report net income fell 23 per cent to S$1.45 billion in 2015, and profit may drop further to S$1.36 billion this year, according to the average of seven analyst estimates compiled by Bloomberg in the past four weeks.

Sembcorp Marine warned in December it would post a fourth-quarter loss and a “significant decline” in 2015 profit. The company could report Feb 15 that full-year net income fell 65 per cent to S$196 million, according to the average of nine estimates.

Plunging oil prices have dragged down orders at Sembcorp Marine, which earns almost all its profit from building oil rigs, and Keppel, which gets about half its profit from that business.

Crude oil fell to US$27.67 a barrel yesterday and is speculated to slump as low as US$15 this year. Both companies announced plans in 2010 — when crude was trading above US$80 a barrel — to build new yards in Brazil.

“There’s not much demand for oil rigs right now,” said investor Jim Rogers, who does not own shares of either Keppel or Sembcorp Marine. Rigs from the two companies are used for very expensive types of oil, he said, while “explorers who are surviving on low-price oil don’t need the type of equipment they’re building”.

Most analysts tracked by Bloomberg do not recommend buying either stock: Nineteen out of 22 analysts suggest selling or holding Sembcorp Marine shares, while the figure is 17 out of 23 for Keppel.

Sete Brasil ordered six semi-submersibles from Keppel and seven drillships from Sembcorp Marine in 2011 and 2012, most of which will be built at their yards in Brazil. These account for about 40 per cent of the companies’ order books, according to Nomura and DBS Vickers Securities. The first units from each builder are scheduled to be delivered in the first quarter of this year, according to a Jan 5 report from Macquarie Group.

Keppel has already recognised about S$2 billion in revenue from the orders, while Sembcorp Marine has recorded about S$2.5 billion, according to a Jan 11 DBS Vickers report. If Sete Brasil files for bankruptcy, the rig builders will probably need to revise their revenues and take impairment charges, it said.

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, 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.

Besides the projects for Brazil, another 30 per cent of Keppel’s and Sembcorp Marine’s are “speculative builds” for which customers have not lined up jobs upon delivery, raising the odds the orders will be delayed or cancelled, Macquarie said.

“The order book is deteriorating and you have bankruptcy risks,” said Mr Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management. “These underlying currents aren’t conducive for a sustained recovery in their operations,” he said. BLOOMBERG

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