No money from Brazil means no work by Keppel for client Sete

[SINGAPORE] Keppel Corp, the world's largest builder of oil rigs, said it won't resume work for a key Brazilian client until the company restarts making payments on its orders.

Sete Brasil Participacoes SA, embroiled in a corruption probe and debating whether it should file for bankruptcy, stopped paying the Singapore-based manufacturer last year on orders for rigs. Keppel announced a S$230 million charge in January on the delinquent projects.

"Keppel has stopped construction on Sete Brasil's rigs since end-2015 and we will not resume construction until payment recommences," Chief Executive Officer Loh Chin Hua said in a statement as Keppel reported a drop in first-quarter net income.

Brazil "continues to be mired in economic and political challenges, as well as the Lava Jato corruption scandal. Shareholders of Sete Brasil have yet to reach a decision on the future of the company."

Dilma Rousseff's presidency is hanging by a thread after Brazil's lower house of Congress voted in favor of her impeachment, threatening to bring down the curtain on 13 years of leftist rule. Many Brazilians say they have had enough of corruption revealed by the two-year investigation known as Lava Jato, or Carwash in English, that has paralyzed Congress and deepened the worst recession in over a century.

For Keppel and Sembcorp Marine Ltd, the world's two largest builders of oil rigs, the troubles in Brazil add to their woes caused by the plunge in oil price.

Slumping crude has dragged down orders at Sembcorp Marine, which earns almost all its profit from building oil rigs. Keppel gets about half its profit from that business. Sete Brasil accounts for a combined US$10.5 billion in orders for semi-submersibles and drill ships at the two companies.

Crude oil fell below US$30 a barrel in January and was speculated to slump as low as US$15 in 2016. Both the companies announced plans in 2010 - when crude was trading above US$80 a barrel - to build new yards in Brazil.

More than US$400 billion of proposed energy projects have been delayed since mid-2014 and pushed into 2017 and beyond as oil prices dropped, according to consulting firm Wood Mackenzie Ltd.

"The sustained low oil price environment continues to take a toll on the global oil and gas industry, which is in the midst of one of the most severe downturns in recent years," CEO Loh said in the statement.

On Monday, Keppel said first-quarter net income dropped 41 per cent to S$211 million while sales tumbled 38 per cent to S$1.7 billion. Higher contribution from its property business at 47 per cent helped to partially offset lower profits from offshore and marine sectors, the company said in the statement.

Keppel fell as much as 1.3 per cent to S$5.92 in Tuesday trading in Singapore. Sembcorp Marine rose as much as 2.9 per cent.

Oil companies and rig operators face rising debt and spending cuts, and have abandoned orders or asked shipyards to delay deliveries of offshore drilling rigs and production facilities.

That's caused shipyards to post losses or smaller profits after writing off costs from projects under construction. Demand has fallen with crude prices still less than half of what they were three years ago.

Keppel's offshore and marine business, the company's largest, secured more than S$190 million of contracts in the first quarter, according to the statement. Property and real estate is the second-largest business of Keppel, accounting for 29 per cent of sales in the period.

BLOOMBERG