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A Major Customer Of Keppel Corporation Limited And Sembcorp Marine Ltd Files For Bankruptcy

There are a number of things in common with oil-rig builders Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51). One important common thread is that both companies count Brazilian oil-rig owner Sete Brasil as a major customer.

Yesterday, Sete Brasil filed for bankruptcy protection. It must be said that Sete Brasil’s bankruptcy is not an entirely unexpected event – the company has long made known the financial trouble it is in.

But, with the bankruptcy happening, it begs the question of what is going to happen to the outstanding orders that Keppel Corp and Sembcorp Marine have with Sete Brasil.

Keppel Corp and Sembcorp Marine have, respectively, at least US$4.9 billion and US$7 billion worth of orders with Sete Brasil. But, both oil-rig builders have made only relatively small impairment charges for the orders so far – Keppel Corp’s impairment is S$230 million while Sembcorp Marine’s is S$329 million.

How much can Keppel Corp and Sembcorp Marine obtain from Sete Brasil’s bankruptcy proceeding? How long would the process take? Are there further impairments to come for the oil-rig builders for Sete Brasil orders? All these are still largely unknown for shareholders.

Meanwhile, the price of oil is around US$45 per barrel today, less than half the level seen in mid-2014, although there has been some rebound seen from the February-low.

A few days ago, major oil producers in the world – both within and outside OPEC – had met to discuss a deal to freeze their output of oil. But, Saudi Arabia had refused any deal if Iran is not part of it. To make things worse, Saudi Arabia is even threatening to increase its production of oil if no freeze deal is signed soon.

Foolish Summary

Can Keppel Corp and Sembcorp Marine weather a storm that looks like it may go on for a while? Will the low price of oil and the bankruptcy of Sete Brasil cause Keppel Corp and Sembcorp Marine to face financial issues of their own? All these are questions that the companies’ management may need to address in the coming months and years.

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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 Keppel Corporation Limited.