US Court dismisses claims against Keppel and SembMarine (Amended)

Singapore

A DISTRICT court in the US has dismissed claims tied to a Sete Brasil-linked lawsuit that were filed against Keppel Corp and Sembcorp Marine.

While the court decision may mitigate the litigation risks spilling over from their previous contracts with Sete Brasil, industry analysts pointing to excess capacity in the market said that it may take years before the two large-cap groups can hope to offload some or all the rigs commissioned by the Brazilian owner.

In two separate morning disclosures on the court ruling on Monday, Keppel Corp and Sembcorp Marine said the United States District Court, District of Columbia, had ruled in favour of them and their two respective business units, Keppel Offshore & Marine (O&M) and Jurong Shipyard Pte Ltd (JSPL).

The two disclosures said Keppel Corp, SembMarine, Keppel O&M and JSPL were added as defendants along with other shipyards and entities in a legal action filed with the US district court. US-based investment firm EIG Management and its eight managed funds commenced the lawsuit against Brazil's national oil company (NOC) Petroleo Brasileiro SA in 2016.

EIG had alleged that it was misled by Petrobras, along with the other named yards and entities, to invest over US$221 million of equity in Sete Brasil, a rig-owning business unit of the Brazilian NOC.

Both Keppel Corp and SembMarine had denied what they described as "baseless allegations".

The two Singapore-listed groups were implicated in the lawsuit because they were commissioned by Sete Brasil for the construction of 13 ultra deep-water (UDW) drilling units at a combined value of US$10 billion.

Considering the EIG claims could spur more legal actions, one observer viewed the court dismissal as a "positive sign" for Keppel Corp and SembMarine.

What continues to divide the market is the two listed groups' remaining exposure to the Sete Brasil fall-out.

Sete Brasil was granted bankruptcy protection from a Brazilian court, but it remains unclear to observers what the restructuring that ensues would spell for the rigs with Keppel Corp and SembMarine.

A Credit Suisse equity analyst said: "If the assigned yards can continue building the rigs, this will be positive accretion to the two listed groups given the rigs have already been subtracted from their order books."

Credit Suisse's view is that the two groups have extended sufficient provisions - Keppel and SembMarine respectively set aside provisions of S$230 million and S$329 million - to their Sete Brasil exposure. But the analyst acknowledged that "the market is still debating over the adequacy of the provisions" until and unless the two groups manage to offload the rigs and their resale prices are disclosed.

The odds, however, are stacked against Keppel Corp or SembMarine securing buyers for the Sete Brasil rigs in the near term, if analyst readings of the offshore drilling market are anything to go by.

Wood Mackenzie's research director Angus Rodger said that conditions of "significant over-supply... open up a window for oil companies to lock in rigs at rock-bottom prices".

"It is unlikely Petrobras and other oil companies will look to fund construction of rigs from scratch or to purpose through to 2020, due to an over-supply of next-generation units that have been constructed over the last five years."

The consensus though, is that the Sete Brasil rigs being built to meet Brazilian requirements including those of local content, eventually still stand a good chance of getting contracted in Latin America.

So it is down to waiting out for the eventual recovery in the offshore drilling market for Keppel Corp and SembMarine.

Mr Ang noted that signs have already emerged of the rig count in Brazil having bottomed out. "The Brazilian rig fleet continued to decline over the past six months albeit at a slower pace than during 2015 and the beginning of 2016," he commented, though qualifying that demand for the next few years can still be met by currently contracted units.

Drastic cost deflation is also supporting investment interest returning to Brazil's large oilfields. Mr Rodger said: "The majority of Brazil's sub-salt oil projects have large reserves that can be developed at break-even oil prices of sub-US$60 per barrel, which qualify them as among the hottest deep-water plays globally."

Amendment note: SembMarine booked provision of S$329 million not US$329 million for its Sete Brasil exposure. The story has been amended to reflect this.