Vard Holdings Ltd Has Just Been Hit With An Order Cancellation For Oil & Gas Assets – Who Is Next?

Vard Holdings Ltd (SGX: MS7), a designer and builder of offshore and specialised vessels, saw its share price fall by 7.7% earlier this morning (as at 11.30am).

Turns out, the company had announced today before the market opened that its 50.5%-owned subsidiary, Vard Promar S.A., had seen two contracts for Liquefied Petroleum Gas (LPG) carriers being cancelled.

The buyer, Petrobras Transportes S.A., has terminated its last two orders for eight LPG carriers that were contracted back in June 2010. The total combined contract value for the eight vessels was US$536 million.

According to Vard Holdings, both cancelled vessels would have very limited impact on its earnings per share. Furthermore, the vessels in question were also at a very early stage in the construction process.

But, it seems that Vard Holdings might be worried about its business in Brazil; the company revealed in the same announcement today that it is now reviewing its overall exposure to the Brazilian market. Brazil is currently Vard Holdings’ second largest market, behind Norway/Romania. As of 30 September 2015, Vard Holdings has 10 orders outstanding from Brazil out of a total order book of 31 vessels.

Like many suppliers to the offshore marine and oil and gas sectors, Vard Holdings’ business has suffered for the most of 2015. In the first three months of the year, the company had accumulated a net loss of NOK520 million (aroud S$84 million) that’s attributable to shareholders. Beyond lower revenue, the company’s numbers were also buffeted by currency exchange losses.

A lack of profit is not the only thing troubling Vard Holdings. The company has seen its debt to equity ratio rising from just 74.2% in 2011 to 329% at end-September 2015. The vessel builder has also failed to generate cash from its business thus far in 2015, with it clocking a negative NOK1.1 billion in operating cash flow for the first three-quarters of the year.

An increase in account receivables from clients, which jumped from NOK9.5 billion at the end of 2014 to NOK11.5 billion at the end of the third–quarter of 2015, had played a role in the cash burn. The jump in account receivables may be a worrying sign. That’s especially so when Vard Holdings’ revenue in the third-quarter of 2015 actually fell by 19% year-on-year.

With the increase in uncertainty in the oil and gas sector and potentially greater risks in Brazil, which company might be next to experience contract cancellations from that market? It is worth noting that both SembCorp Marine Ltd (SGX: S51) and Keppel Corporation Limited (SGX: BN4), the big Singapore-based rig builders, have exposure to the Brazilian market as well.

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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 Ltd.