Keppel and Sembmarine could weather Sete Brasil contract exits

Analysts think their rig contracts won’t be cancelled as they are in a more advanced stage of completion.

Petrobras and Sete Brasil have reached a key agreement that calls for the construction and delivery of four drilling units. Sete Brasil, which has been operating under bankruptcy protection since April 2016, will keep the charter referring to four drilling rigs, whilst terminating the contracts for another 24 units, OCBC Investment Research said, citing Upstream.

OCBC Investment Research analyst Low Pei Han noted that Sete Brasil initially ordered the construction of 29 rigs (one on speculation) with five shipyards including two belonging to Keppel Corp (Keppel) and Sembcorp Marine (Sembmarine). “Construction of the rigs was suspended in 2015 after Sete Brasil ceased payments due to financial difficulties, and problems were exacerbated following bribery allegations. It was not disclosed which four rigs will remain with contracts, but it is likely that they would be rigs in a more advanced stage of completion at yards that are more established. As such, we believe that the likely candidates are two units by Keppel and Sembmarine.”

Keppel and Sembmarine previously said that earlier provisions made for the Sete Brasil contracts have been sufficient, based on their last updates with available information as of then. The completion status for Keppel’s rigs are 92% for the 1st unit, 70% for the 2nd, 40% for the 3rd, 21% for the 4th, below 10% for the 5th and 6th. For Sembmarine’s rigs, the 1st is about 90% completed, 80% for the 2nd, 60% for the 3rd, 40% for the 4th, and lower for the rest.

Low said, “As more details regarding the four rigs are disclosed by Sete Brasil, we will look out for whether 1) the four rigs are indeed Keppel’s and Sembmarine’s, 2) if there are any adjustments to the original contract prices (US$800m+/rig on average) considering that dayrates for rigs are lower now, and 3) if there is any compensation for the termination of the remaining rigs. Whether additional provisions have to be made or allowances can be reversed depends on the answers to these questions as well as the assumptions that Keppel and Sembmarine made when they made their provisions, which we are not privy to.”

Moreover, sentiment in the overall industry has been improving. “We see this recent development as another sign that companies are willing to restart their capex programmes. However, as mentioned in our earlier reports, the recovery is still a gradual one, and a sustained flow of new orders is required for a re-rating of stocks in the sector,” Han added.

It has been a rough few years for the oil and gas sector, but the industry continues to recover, albeit gradually. “Major oil and gas players are firming up their final investment decisions (FIDs) as oil prices stabilise; breakeven costs for offshore oil and gas have also dropped with cost deflation in recent years. As such, barring a plunge in oil prices, we are expecting more new orders for Sembmarine this year, considering that it also signed two LOIs last year worth at least S$1b; one for SeaOne to build at least two large Compressed Gas Liquid Carriers and another for Shell’s Vito FPU,” the analyst added.

Moreover, there is also the possibility of cost savings as the group consolidates its operations in the new Tuas yard which is highly automated and requires less labour. This could allow the group to tender for larger orders that it previously could not secure due to space and capabilities constraints.