Sembcorp Marine Ltd’s Sete Brasil Saga: 5 Quick Things Investors Should Know

Oil rig builder Sembcorp Marine Ltd (SGX: S51) has endured a tough three-year stretch.

With oil prices today less than half what they were at their 2014 peak, Sembcorp Marine has had to grapple with tepid customer demand. Sete Brasil’s financial difficulties (and eventual bankruptcy in 2016) was one of the major incidents to have hit Sembcorp Marine. In its 2016 annual report, Sembcorp Marine outlined the chronological history of the Sete Brasil saga.

Here are five key points to take away from the summary:

1. It all started in 2012

Sembcorp Marine wrote:

“In 2012, Sembcorp Marine secured seven drillship contracts from Sete Brasil. To summarise, we received some $2.70 billion in progressive payments for the work performed on these projects, up until November 2014 when Sete Brasil was unable to continue with the payments.”

Between February 2012 and November 2012, Sembcorp Marine received orders for seven drillships from Sete Brasil. Back then, Sembcorp Marine had planned to deliver the drillships progressively between 2015 and 2019. The deals were working for a while as Sete Brasil had paid out a total of $2.7 billion to Sembcorp Marine by November 2014.

But then, payments from Sete Brasil stopped and things started to go wrong.

2. A stone in the cog

As payments dried up and rumours of Sete Brasil’s bankruptcy started making the rounds, Sembcorp Marine stopped work on the drillships. The company wrote:

“With the payment stoppage, we have also ceased construction work on all the drillship units and focused instead on preserving the value of the works in-progress.”

3. The bankruptcy

In April 2016, Sete Brasil filed for judicial restructuring. Sembcorp Marine describes:

“On 29 April 2016, Sete Brasil filed for judicial restructuring and accordingly submitted its restructuring plan to the Brazilian court. We continue to engage with Sete Brasil as necessary to better understand its restructuring plan. We are monitoring the situation actively and will be well prepared to respond to the developments, as appropriate.”

As a result, Sembcorp Marine has started its own arbitration proceedings:

“We have since initiated arbitration proceedings against various Sete Brasil subsidiaries to safe-guard our interests under the Sete Brasil contracts.”

4. Taking provisions

The outcome of the Sete Brasil arbitration proceedings is unpredictable. That could be why Sembcorp Marine took a $329 million charge in 2015 for Sete Brasil-related projects:

“Meanwhile, we believe the $329 million provisions the Group made in FY2015 for the Sete Brasil contracts remain adequate under the present circumstances.”

From Sembcorp Marine’s latest 2017 first quarter earnings presentation, the rig builder continues to believe that the charge is adequate.

5. Orders remain, but …

Sembcorp Marine still reports Sete Brasil’s orders as part of its net order book. But, it has also started separating out Sete Brasil’s orders in its reporting. Here’s how Sembcorp Marine described its net order book in end-2016 in its annual report:

“As at 31 December 2016, our net order book backlog totals $7.84 billion. Excluding the Sete Brasil drillships, the order backlog remains reasonable at $4.71 billion.”

As it stands, there are Sete Brasil orders worth $3.1 billion for Sembcorp Marine that are yet to be fulfilled. It is unknown whether the orders will ever be executed.

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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.