Provisions back in focus as Sete Brasil gets bankruptcy filing nod

Singapore

SETE Brasil's bankruptcy filing approved before Thursday trading hours marked the first step forward towards removing the overhang over the biggest rig-building contracts on the order book of Keppel Offshore & Marine and Sembcorp Marine.

With the path cleared for the restructuring of Sete Brasil, the ball is once again in the court of Keppel O&M and SembMarine on whether further provisions will be made for the contracts from the rig-owning affiliate of Petrobras.

A Keppel Corporation spokesman maintained in a response to The Business Times: "The provision of S$230 million made in 4Q 2015 for our projects with Sete Brasil remains adequate for now."

"We are monitoring the situation closely. So far, we have not received any formal notification from Sete Brasil," the spokesperson said.

SembMarine has set aside S$329 million of provision for its Sete Brasil drillship contracts. A spokesman said: "The group will make the necessary announcement if there is material development."

Equity analysts who were previously divided on the adequacy of the Sete Brasil provisions on the books of the rig-builders are also holding their breaths for the restructuring of the troubled Brazilian entity to pan out in its entirety before solidifying their assessments.

"It remains uncertain what (Sete Brasil) stakeholders intend to do with the rig orders and whether more provision is required at this juncture," DBS Vickers Ho Pei Hwa said.

"We may not still have that clarity on whether Keppel and SembMarine's contracts will be entirely intact, whether they would be paid, but at least there should be actions taken to resolve this," a Maybank Kim Eng analyst said separately.

The shareholders of Sete Brasil are expected to next appoint an administrator to negotiate the settlement towards rig-building contracts at the heart of the fallout of the Brazilian entity, with Petrobras, one industry veteran told BT. This would form the basis of talks with vendors for the rig-building contracts with Keppel O&M and SembMarine.

The protracted process will see the dark cloud hovering over the two rig-builders extending for months more. Most equity analysts backing up Keppel O&M and SembMarine on the adequacy of their Sete Brasil provisions - citing local content in Brazil as a major consideration in offshore marine contracting - have assumed Petrobras will honour the charters at least on the rigs that were in advanced stages of construction.

Keppel O&M and SembMarine have pledged to deliver the rigs on Brazilian soils from their subsidiaries, BrasFels and Estaleiro Jurong Aracruz (EJA). EJA yard is still under development.

The fate of the Sete Brasil's rig-building contracts is closely entwined with the anti-corruption probe in Brazil that is strangling the finances of the Brazilian government and Petrobras' lifeline, one rig analyst told BT.

"Petrobras is cutting back on its activities and laying off rigs, so it will not be looking to contract new ones for a long time," the rig analyst said, in supporting an ominous reading of a larger than expected financial damage from Keppel O&M and Sembcorp Marine's Sete Brasil's rig building contracts.

One larger unknown that will swing the outcome of the Sete Brasil fallout is whether the anti-corruption probe widely perceived as behind Brazil's financial troubles will outlast the patience of Sete Brasil's shareholders now seeking for a recourse.

The duration of the anti-corruption probe will also determine when Petrobras would return to the market to charter more rigs and whether it can honor some, if not all, the charters - even if at reduced terms - with Sete Brasil.

Keppel O&M and SembMarine have rig building contracts worth US$4.9 billion and US$5.6 billion respectively from Sete Brasil.

Maybank Kim Eng, which is among a handful of brokerages arguing for more provisions against the outstanding Sete Brasil contracts, has maintained a sell on Keppel Corp and SembMarine.

OCBC Investment Research has a hold on Keppel and a sell on SembMarine.

Shares in Keppel Corp and SembMarine closed at S$6 and S$1.87 respectively on Thursday, up one cent and two cents.