Keppel Stops Work for Brazil Client, Takes $160 Million Hit

  • Many deliveries slated for 2015 pushed back to this year
  • Net income for all of 2015 is down 19% from a year earlier

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 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, which is also embroiled in a corruption probe, progressed by less than 4 percent per quarter last year, Singapore-based Keppel said in a statement Thursday.

Loh Chin Hua speaks during a news conference in Singapore.
Loh Chin Hua speaks during a news conference in Singapore.
Photographer Nicky Loh/Bloomberg

"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. "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 reported Thursday 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. Full-year profit of S$1.53 billion was the company’s lowest in five years.

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.

Brazilian Troubles

Keppel shares fell 0.6 percent Thursday to S$4.80 before the earnings announcement. The stock is down 26 percent since the beginning of the year, making it the third-worst performer on the Straits Times Index, which has fallen 12 percent. Sembcorp Marine shares rose 1 percent Thursday to S$1.50 and are down 14 percent so far this year.

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. While he expressed confidence that China will right itself and said he doesn’t see a high risk of further cancellations, he said Keppel must "plan for a longer winter."

Loh dwelt at length at the troubles in Brazil, saying Keppel had drastically slowed work on Sete’s projects in 2015 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."

About 70 percent of Keppel’s and Sembcorp Marine’s orderbooks are at risk of being canceled, according to Macquarie. Besides the projects for Brazil, another 30 percent of their orders are “speculative builds” for which customers haven’t lined up jobs upon delivery, raising the odds the orders will be delayed or canceled, the brokerage said.

Wide Impact

Keppel said Thursday it received total orders of S$1.8 billion last year and has a total orderbook of $9 billion. The company, which said it has shed 6,000 permanent staff and 7,900 subcontract staff over the past year, said it expects to deliver 25 newbuildings in 2015 and its yards will remain busy for the rest of this year.

Sete Brasil is among more than a dozen companies crippled by the 22-month Petrobras corruption probe, whose impact in Asia is being felt beyond the Singapore yards. Japan’s Kawasaki Heavy Industries Ltd. said Jan. 14 it will book a charge of 22.1 billion yen ($189 million) and expects to cut forecasts for this fiscal year. Its Brazilian venture hasn’t been paid in more than a year because of the corruption issues, the Japanese company said.

Mitsubishi Heavy Industries Ltd. is among five companies that will give up a 30 percent stake in a Brazilian venture building vessels for Petrobras, the Nikkei reported earlier this month, without citing anyone.

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