Here’s What Sembcorp Marine Ltd Shareholders Should Know About the Troubled Waters at Sete Brasil

Oil rig builder Sembcorp Marine Ltd (SGX: S51) has endured some tough times of late.

Earlier in the year, one of its major customers, the Brazilian oil & gas company Sete Brasil, filed for bankruptcy. Meanwhile, Sembcorp Marine is also involved in a legal tussle with another of its customers, Marco Polo Marine Ltd (SGX: 5LY).

Moreover, Sembcorp Marine had to slash its 2015 dividend by more than half, casting doubt on the sustainability of its dividend in the future.

The company had released its latest annual report for 2015 a few months ago. The report had shed some light on the company’s woes with Sete Brasil that may interest investors.

A full section in the Chairman and CEO’s Statement in the report was devoted to Sete Brasil. Here’s Sembcorp Marine’s leaders with some background on the problem:

“Sembcorp Marine had secured seven drillship contracts in 2012 from Sete Brasil. These drillships are in various stages of completion. To date, we have been paid a total of approximately $2.70 billion, progressively for work done, before the payments stopped in November 2014.”

The situation has led Sembcorp Marine to slow down construction for Sete Brasil projects in late 2015. The oil rig builder’s leaders added:

“Sete Brasil has also been trying to resolve its financing problems through various restructuring plans, but has yet to obtain consensus from all key stakeholders. The media had reported that Sete Brasil was considering filing for judicial reorganisation, the Brazilian equivalent of a Chapter 11 in the US.”

Given the circumstances, Sembcorp Marine had taken a provision of $329 million in 2015 for its Sete Brasil projects. The Chairman and CEO’s statement had a portion that explained what the provision covers:

“However, in light of such uncertainties, we have made a provision of $329 million for the Sete Brasil projects. This amount takes into consideration, in our view, the full extent of our exposure, 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 Brasil contracts.”

In Sembcorp Marine’s presentation for its 2016 first-quarter earnings, Wong Weng Sun, the company’s chief executive, had acknowledged that the Sete Brasil situation is complex. In an April 2016 update, Sembcorp Marine said that it has commenced arbitration proceedings against Sete Brasil to protect its interests.

The complexity does not end there. Sembcorp Marine has also been sued by a fund management firm, EIG Management. Here’s the company explaining the situation in a statement released in late May this year:

“The article reported that Sembcorp Marine Ltd and its subsidiary Jurong Shipyard Pte Ltd have been named as defendants along with other shipyards and entities in a complaint filed by EIG Management against Petrobras with respect to their investments in Sete Brasil Participacoes SA…

According to that article, EIG alleged that the entities conspired to induce funds managed by EIG to invest in Sete Brasil.”

Sembcorp Marine believes that the lawsuit by EIG is baseless and the oil rig builder intends to vigorously defend itself against it.

With the multitude of issues at hand that involve Sete Brasil, it seems like the situation could drag on for a while for Sembcorp Marine.

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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.