Here’s What SembCorp Marine Ltd Said About Sete Brasil and the Future of the Oil Industry  

Sembcorp Marine Ltd (SGX: S51) has had its share of troubles lately.

One of its major customers, the Brazilian company Sete Brasil, filed for bankruptcy earlier this year. Meanwhile, the oil industry continues to suffer from low oil prices. For perspective, the price of oil is around US$40 per barrel today, down from a 2014-peak of over US$100.

Wong Weng Sun, Sembcorp Marine’s chief executive, touched on these topics in the company’s recent 2016 second-quarter earnings announcement. Here’re a few snippets from Wong which may interest investors.

On a prolonged downturn in the oil industry

Wong provided his view on the oil industry:

“The collapse in oil prices since the second half of 2014 has continued to impact the entire upstream oil and gas industry value chain, particularly our customers and partners in the exploration segment.

Day rates and utilisation for drilling rigs have fallen drastically, resulting from sweeping capex cuts in offshore oil & gas exploration. Despite oil prices recovering from recent lows of below US$30/barrel to the present US$45 – US$50/barrel range, industry experts continue to forecast a prolonged downturn for the upstream oil and gas industry.

Understandably, with fewer drilling contracts and surplus of rigs, some drillers continue to be unable to take delivery of their new build rigs.”

This storyline might sound familiar to some of you.

Sembcorp Marine’s peer, Keppel Corporation Limited (SGX: BN4), had also recently warned about a long and harsh winter. It looks like both Sembcorp Marine and Keppel Corporation agree on one thing: An improvement in oil prices does not mean an immediate upturn in business.

It will take time for higher oil prices to translate into new drilling orders.

On Sete Brasil

Sembcorp Marine had received seven drillship contracts from Sete Brasil in 2012. The drillship projects were in progress when Sete Brasil’s payments stopped in November 2014. At the end of 2015, SembCorp Marine said that it has received around S$2.7 billion from Sete Brasil.

As Sete Brasil’s problems became apparent, Sembcorp Marine took a S$329 million provision in the fourth-quarter of 2015. Sete Brasil then filed for bankruptcy protection on 22 April 2016.

In the latest earnings announcement, Wong provided an update on Sete Brasil:

“We have been informed that Sete Brasil is preparing its restructuring plan and is in active negotiations with its various creditors.

We have also announced on April 22, 2016 that we have commenced arbitration proceedings against various subsidiaries of Sete Brasil to preserve our interests under the Sete Brasil contracts. The arbitration proceedings are ongoing.

Without prejudice to our arbitration proceedings, we continue to engage with Sete Brasil to better understand their restructuring plan and actively monitor the situation and its implications.”

Wong also reiterated that the provisions taken were sufficient:

“The Group had in the last financial year made provisions of S$329 million for the Sete Brasil contracts. We believe that the provisions remain sufficient under the present circumstances.”

At the moment, Sembcorp Marine has a net order book of S$9.2 billion. Excluding Sete Brasil projects, Sembcorp Marine’s order book would be S$6 billion.

To keep up to date on the latest financial and stock market news and for more investing insights, you can sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.