Keppel Corporation Limited and SembCorp Marine Ltd Are Embroiled In A Bribery Scandal: What Does It Mean For Investors?

In what must have sounded like music to the ears of investors in rig builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51), oil had “capped its best week in almost four years” last week according to Bloomberg.

Unfortunately, before anyone could actually hold a mini-celebration of any sort, Keppel Corp and Sembcorp Marine have found themselves to be in a rather uncomfortable position again.

The chief executive of Brazilian oil producer Petroleo Brasileiro SA, better known as Petrobras, resigned earlier this month after the state-owned oil giant was accused of being in a bribery scandal that involves the Brazilian government.

According to a Business Times article published earlier today, the Brazilian media had recently (as recent as last week) reported on claims that both Keppel Corp and SembCorp Marine have a part to play in the bribery shenanigans too. The two firms have significant businesses in Brazil.

Keppel Corp, through its various subsidiaries, has been running a business in Brazil since 2000. Along the way, the company had grown its BrasFELS yard in the country into one of the most comprehensive offshore and marine facilities in Latin America.

The scandal has come at a very inopportune momment for SembCorp Marine as the company had just started operations in the second half of 2014 for its new integrated shipyard in Brazil, the Estaleiro Jurong Aracruz. The yard has major projects on hand that deal with FPSO (floating, production, storage, and offloading) conversions and the fabrication of drill ships. It seems that Petrobras is expected to be one of the main customers for this yard.

Both Keppel Corp and Sembcorp Marine have since responded with press releases of their own to deny any involvement with the Petrobas scandal.

Although it’s hard to know now how both companies might be affected if they are proven to be guilty, there is a pressing issue on hand at the moment. And, it is the possible reduction in business from Petrobras in the future.

With Petrobras in crisis management mode right now, it’s easy to imagine a situation where the Brazilian oil producer has to scale back its operations and expansion. This can then negatively affect Keppel Corp’s and SembCorp Marine’s business in Brazil.

Foolish Summary

Investigation for the bribery the scandal might take a long time. Between now and then, as mentioned previously, Petrobras might be obligated to slow down its operations and review its processes; both spell a dampener for revenue for both Keppel Corp and SembCorp Marine in the short term in Brazil.

It would be interesting to see how the two local rig builders handle this crisis.

At their current prices, Keppel Corp and Sembcorp Marine have a price to earnings ratio of 8.7 and 11.2 respectively. Both shares also carry trailing-12-month dividend yields of 5.5% and 4.3% respectively.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Keppel Corporation Limited.