Forget Sete Brasil: There’s an even bigger cancellation storm ahead for rig builders

Both companies face up to $1b in write-downs.

While corruption-riddled Sete Brasil’s fate hangs in the balance, Singapore’s two biggest rig builders should also brace for a wave of contract cancellations from its other large customers.

A report by Maybank Kim Eng highlighted that both Keppel Corporation and Sembcorp Marine have already faced order deferments from their clients. The report warned that it is possible that these deferments may eventually turn into cancellations.

“Yards finance their construction with working capital and do not get paid unless clients take delivery. While clients could still take delivery in the end, deferment carries the risk of order cancellation,” Maybank Kim Eng said.

The report warned that a continued downbeat market for oil and depressed asset prices could pile the pressure on clients to forgo deposits. And as many rigs are contracted on backend-loaded payment terms such as 20% downpayment and 80% payment on delivery, both Keppel and SMM may be unable to re-sell contracted rigs at their original prices.

This will lead to a write-down of book values and already-recognised profits. Maybank Kim Eng estimates that both companies stand to lose up to $1 billion if these order deferments do turn into deferments.

“With depressed asset prices and delivery uncertainties, yards may need to mark down their inventories and work-in-progress (WIP). Recognised profits may need to be reversed. We estimate that Keppel and SMM may need to write down as much as SGD1b and SGD0.9b respectively,” said the report.

“More than half our estimate writedown relates to non-Sete Brasil contracts. In our view, this is the other shoe that has yet to drop,” Maybank Kim Eng warned.