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SembCorp Marine Ltd Talks About Sete Brasil (and Problems with Other Customers)

Sembcorp Marine Ltd  (SGX: S51) has endured a tough 2016 so far.

In the first nine months of the year, the company has seen its revenue and profit shrink by 25% and 82%, respectively, compared to the same period in 2015.

Unfortunately, there are signs that Sembcorp Marine’s problems are set to drag on. Ongoing issues with its customers such as Sete Brasil adds to the woes.

When Sembcorp Marine released its 2016 third-quarter earnings last week, the company’s chief executive, Wong Weng Sun, provided an update on some of its major customers.

The Sete Brasil saga

Brazilian company Sete Brasil, which is one of Sembcorp Marine’s major customers, filed for bankruptcy earlier this year. Wong provided an update on Sete Brasil in his opening address:

“Following its filing for judicial restructuring on April 29, 2016, Sete submitted its restructuring plan on 12 Aug 2016. Sete Brasil continues to discuss with its creditors, shareholders and other stakeholders to find an equitable solution.

We 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 as necessary to better understand its restructuring plan and actively monitor the situation and its implications.”

Wong added that Sembcorp Marine had taken a provision of $329 million in 2015 for Sete Brasil-related projects. Sembcorp Marine believes that the provision is still sufficient, based on current circumstances.

Wong then went on to discuss other problematic customers.

When it rains, it pours

Sembcorp Marine has another two customers that have fallen into difficulty in the current oil rout. The first one is Malaysian oil-rig contractor, Perisai Petroleum Teknologi (KLSE: 0047.KL), which happens to be an associate company of Singapore oil and gas services provider Ezra Holdings Limited (SGX: 5DN). Wong said:

“Our customer, Perisai recently declared its insolvency in response to Bursa Malaysia after it was unable to meet its financial obligations to its bondholders. We have taken steps to protect our interests in the rig which has been completed and technically accepted by Perisai.

For the second rig which is due for completion during 4Q 2016, we are evaluating various courses of action to protect our interests.”

The second company would be Oro Negro, a Mexican oil services provider that had recently defaulted on its bond payments. Wong also shared the status on that front:

“For the 3 rigs which have been deferred by Oro Negro, we continue to evaluate solutions for them, including the sale to third parties. All three rigs have been completed and technically accepted by Oro Negro.”

Sembcorp Marine ended the third-quarter of 2016 with a net orderbook of $8.3 billion. Excluding the contracts with Sete Brasil, the order book would be $5.2 billion.

Foolish summary

Sembcorp Marine’s trade and other receivables increased from $590 million in the third-quarter of 2015 to $700.9 million in the third-quarter of 2016. The higher receivables may be a symptom that Sembcorp Marine has not been able collect payments from its customers in a timely fashion.

With the current issues surrounding three of the company’s customers, trade and other receivables could be one line item on Sembcorp Marine’s balance sheet to look out for in the future.

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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.