Sembcorp Marine Ltd Talks About Sete Brasil And Problems with Other Customers

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

The oil rig builder reported a revenue decline of over 28% in 2016. Unfortunately, there are signs that Sembcorp Marine’s problems may drag on. Ongoing issues with its customers, such as the bankrupted Sete Brasil, may continue to be a thorn in Sembcorp Marine’s side.

In Sembcorp Marine’s 2016 fourth quarter earnings release, 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, one of Sembcorp Marine’s major customers, filed for bankruptcy in early 2016. Wong provided an update in his opening address for the 2016 fourth quarter earnings:

“Following its filing for judicial restructuring on 29 April 2016, Sete submitted its restructuring plan to the Court in Brazil on 12 August 2016. A revised plan was submitted on 23 December 2016. A general creditors meeting is scheduled later this month.

Sembcorp Marine announced on 22 April 2016 that we had commenced arbitration proceedings against various subsidiaries of Sete Brasil to preserve our interests under the Sete Brasil contracts.

The arbitration proceedings are ongoing.

We continue to engage with Sete Brasil as necessary to better understand its restructuring plan. We are also actively monitoring the situation and its implications, so as to be well prepared to respond strategically, as appropriate.”

Wong also repeated that Sembcorp Marine had taken a provision of $329 million in 2015. The company believes that the provision is still sufficient for the case of Sete Brasil, based on current circumstances.

There are more customer problems beyond Sete Brasil though.

Oil contagion

Sembcorp Marine has another two customers that have fallen into trouble in the current oil price rout. The first one is Malaysian oil-rig contractor, Perisai Petroleum Teknologi KLSE: 0047.KL), an associate of the Singapore company Ezra Holdings Ltd  (SGX: 5DN). Wong gave an update:

“One of our customers, Perisai, recently announced its insolvency and is undergoing financial restructuring. We have taken steps to protect our interests in the two rigs which have been completed and technically accepted by Perisai.”

Investors may want to note that Ezra is itself in hot soup – the company is at risk of going bankrupt.

The second customer of Sembcorp Marine that is struggling would be Oro Negro, a Mexican oil services provider that recently defaulted on its bond payments. Wong also shared updates on Oro Negro:

“We continue to discuss with Oro Negro regarding their three jack-up rig deferments. The rigs have been completed and technically accepted by Oro Negro.”

At the end of December 2016, Sembcorp Marine had a net orderbook of $7.8 billion. Excluding the contracts with Sete Brasil, the order book would be $4.7 billion. Wong said that Sembcorp Marine had taken a $280 million provision in 2015 to cater for possible cancellations and prolonged deferment. The provisions remain adequate, according to Wong.

Foolish summary

Sembcorp Marine’s trade and other receivables fell from around $590 million in 2015 to $492 million at the end of 2016. The lower receivables suggest that Sembcorp Marine has made progress in collecting payments from its customers in a timely fashion.

The current issues surrounding three of Sembcorp Marine’s customers continue to persist. Investors may want to keep an eye on the company’s receivables line.

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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.