Here’s What Investors Need to Know about SembCorp Marine Ltd and What It Is Doing about Sete Brasil

SembCorp Marine Ltd (SGX: S51) has been caught in a funk lately. Dark clouds such as a recent dividend cut and the potential bankruptcy of one of its major customers, Sete Brasil, have weighed on its shares.

All told, the rig builder has seen its shares shrink by nearly 50% since the start of 2015. In a recent earnings briefing in February 2016, there were a few snippets shared by Sembcorp Marine’s management that dealt with how it’s handling the Sete Brasil issue.

First off, Wong Weng Sun, Semcorp Marine’s chief executive, gave an overview of what has happened so far:

“As you know, Sembcorp Marine had secured seven drillship contracts in 2012 from Sete Brasil. These drillships are in various stages of completion, and to-date, we have been paid a total of approximately S$2.7 billion, progressively for work done, before the payments stopped in Nov 2014.”

The situation mirrors what is happening at Sembcorp Marine’s peer, Keppel Corporation Limited  (SGX: BN4)  – payments from Sete Brasil had also stopped for Keppel Corp since November 2014. In light of the situation, Sembcorp Marine has taken measures to stem the tide:

“In light of the payment stoppage, during the course of 2015, we have taken measures to minimise our exposure by significantly slowing down construction; focusing on the four more advanced units, mainly work to preserve their value, with minimal work on the rest.

In the meantime, we have been engaging Sete to explore solutions to progress the projects. Sete has also been trying to resolve its financing problems through various restructuring plans, but has yet to obtain consensus from all key stakeholders.

In November last year, the media had reported that Sete was considering filing for judicial reorganisation (JR), the Brazilian equivalent of a Chapter 11 in the US. At a shareholders’ meeting held on 19 Jan 2016 to vote on this matter, the decision was postponed.”

Based on the current situation, SembCorp Marine has also taken some provisions for Sete Brasil projects:

“We are monitoring the situation closely and are preparing to strategically respond to various potential outcomes. However, in light of such uncertainty, we have decided to adopt a prudential approach to this matter by making a provision of $329 million for the Sete projects in our 4Q 2015 results.

This figure takes into consideration, in our view, the full extent of our exposure to the Sete contracts, including, the amount of unpaid invoices and construction progress, and amounts to be paid to our suppliers and vendors. We believe that under the present circumstances, our provision is sufficient to address any potential adverse outcomes to the Sete contracts.

Our current order book will also be reduced by approximately S$3.2 billion should all seven Sete contracts be cancelled.”

For some perspective, Sembcorp Marine’s net order book at the end of December 2015 was S$10.4 billion and so, Sete Brasil-related projects make up over 30% of the net order book. To date, there have not been any major update or announcements from Sembcorp Marine on the Sete Brasil situation. As such, we will have to wait for further updates.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.