Could Keppel Corporation Limited See More Of Its Customers Fall Into Financial Difficulties?

Earlier this month, news surfaced that one of the major customers of Keppel Corporation Limited (SGX: BN4), the Brazilian oil & gas company Sete Brasil, might file for bankruptcy.

After that revelation, there have been uncertainty over how badly Keppel Corporation might be affected because of whatever will happen to Sete Brasil. In Keppel Corporation’s earnings for the fourth-quarter of 2015, the company had made a S$230 million impairment due to concerns over its Brazilian customer.

But for me, this whole episode raises the questions:  What is happening to Keppel Corporation’s other customers? Would we see more impairments for Singapore’s rig builder from other parties going forward?

With this in mind, let’s investigate another customer of Keppel Corporation’s oil and marine division, the Malaysia-based Bumi Armada Berhad (KLSE:5210.KL).

As one of the largest offshore support vessel providers in the region, Bumi Armada is a long-standing customer of Keppel Corporation. In 2015, Keppel Corporation had won a number of projects from the company (for instance, see here and here).

How is Bumi Armada doing?

In the first three quarters of 2015, Bumi Armada had fallen into losses of RM155 million. If there is no major uplift in profit for the last quarter of 2015, the company might report a loss for the whole year. If that really happens, it would be the first full-year loss Bumi Armada has reported since 1997, when it made a loss of RM36 million.

On the balance sheet side, the company still held about RM2.0 billion in cash and short-term investments as of 30 September 2015. That’s a big slug of liquid readies. Unfortunately, Bumi Armada has way more debt and its net debt to equity figure (as of the same date) was at an unhealthy level of 81%.

Given that Bumi Armada also has negative free cash flow of RM2.6 billion in the first nine months of 2015, the current status of its balance sheet is quite worrying.

What can Keppel Corporation do?

With the worsening macro environment in the oil and gas industry (the price of oil is around US$30 per barrel now after falling from over US$100 in mid-2014), Keppel Corporation may want to keep an eye on the credit risks it might be facing with each of its customers.

In these tough times, Keppel Corporation must ensure it can survive through the storm. Yesterday, The Straits Times reported that Keppel Corporation’s major shareholder, Temasek Holdings, one of the Singapore government’s investment arms, may already be discussing ways for the company to strengthen its balance sheet. The ways include the possible sale of Keppel Corporation’s stakes in M1 Ltd (SGX: B2F) and Keppel REIT (SGX: K71U).

Foolish Summary

There is a saying in Chinese that might be apt for what I think Keppel Corporation needs to focus on right now: “留得青山在, 不怕没柴烧.” The phrase translates into “when there’s life, there’s hope.”

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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.