Viva Brasil? Not Anymore For Keppel Corporation Limited And SembCorp Marine Ltd

Brazil used to be an exciting growth market for Singapore’s oil rig builders Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51). Both companies even built yards in the country.

But the situation in Brazil has soured since 2014. In that year, issues with corruption surfaced within Petrobras, the national oil and gas company of Brazil. The problem has since worsened, with Sete Brasil, a key customer of Keppel Corporation and Sembcorp Marine, filing for bankruptcy protection earlier this year; Petrobras is a shareholder and the only client of Sete Brasil.

To add fuel to fire, both Keppel Corporation and Sembcorp Marine are being probed by investigators for any possible participation in Petrobras’ corruption case. Although the two Singapore companies have denied any connection and knowledge of any wrong-doing by their staff, there have been negative developments.

EIG Management, an investment firm from the US, had filed a lawsuit against those related to the Petrobras incident. Amongst those accused of wrong-doing by EIG include Keppel Corporation and Sembcorp Marine. Brazil’s interim president, Michel Temer, was also recently dragged into the entire corruption saga.

Implications for Singapore’s oil rig builders

Both Keppel Corporation and Sembcorp Marine should expect a long dry spell for their business operations in Brazil. Given that the whole corruption case involves high-ranking politicians and that Petrobras is a major company in the country, the situation might take years to resolve.

In the meantime, the chances of Petrobras placing any large orders for oil rigs are miniscule. Then, the ongoing probe and lawsuit might mean that Keppel Corporation and Sembcorp Marine could face fines or punishments in the future.

Adding insult to injury, the current environment of low oil prices means that even if the Petrobras situation can be resolved nicely, business activity in Brazil’s oil & gas industry would likely not be able to return soon to where it was during the oil-boom period of three to four years ago.

So, both Keppel Corporation and Sembcorp Marine are stuck in a difficult spot. They have expanded into a market that currently – and likely for the foreseeable future – has no business and are also looking at possible legal-related liabilities. What’s more, the best case scenario in Brazil will also likely not be able to bring the oil & gas industry there back to its previous glory days.

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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.