Three key risks seen from rig order default

SINGAPORE - The market will be waiting for indications from the release of the FY2015 report cards of two large-cap Singa-pore-listed offshore and marine (O&M) players about the extent of their financial exposure to a potential default of the Sete Brazil rig orders valued at a combined US$10 billion (S$14.3 billion).

Red flags were hoisted on Keppel Corporation and Sembcorp Marine after news broke on Jan 8 on Sete Brasil's potential bankruptcy filing, which raised the default risks associated with the 13 ultra deep-water drilling units placed with the two Singapore-listed O&M players.

Sete Brasil has six semi-submersible drilling units valued at US$4.9 billion on order at Keppel Offshore & Marine and seven drillships valued at US$5.5 billion at SembMarine. Each of the two yard groups is understood to have commenced work on three to four of the rigs on order from Sete Brasil.

Analysts have highlighted three main downside risks - contract cancellations, revenue reversals and asset value writedowns - stemming from a potential Sete Brasil bankruptcy filing.

In a Jan 19 global market research note, Nomura downplayed the contract cancellation risk, flagging expectation that bankers behind Sete Brasil could step in to fund the remaining rig orders with Keppel and SembMarine.

"Should the bankers unexpectedly decide not to rescue any orders as Petrobras surprisingly decides to use rigs built without the legally-mandated local-content at the rig building phase, we expect only one of the 13 contracts to need provisions," a Nomura analyst said.

Even if a debt restructuring plan were to be put in place, some analysts raised concerns over price renegotiation, or yard financing may be required for the rig-building contracts to remain standing.

Others have also argued for the possibility of Sete Brasil cancelling orders on rigs that have not physically commenced construction at Keppel O&M and SembMarine's yards.

Petrobras would have been able to contract rigs at steep discounts as a result of the demand destruction from an oil price collapse and this does not support the business case for construction to proceed on the outstanding rigs, a Maybank Kim Eng analyst said.

Maybank Kim Eng estimates the four semi-subs under construction at Keppel O&M's yard in Brazil are 16-90 per cent complete, while the Semb-Marine's drillships range from 30-85 per cent complete. Each yard operator has recognised at least S$2 billion of revenue from their share of Sete Brasil contracts, which could mean revenue reversals in the first quarter of FY2016 or beyond, if the bankruptcy filing were to be decided after the results release.

"We estimate each yard operator has collected S$2-2.5 billion from Sete Brasil," the Maybank Kim Eng analyst said in an email to The Business Times, and these tie in with separate estimates from the Nomura research note.

The yard groups will also face potential asset writedown risks on the Sete Brasil rigs if the contracts were to be cancelled, according to Maybank Kim Eng.

"We think that the asset valuation for a UDW (ultra deep-water) rig would need to be priced down 10-20 per cent from the US$600 million level before the oil price downturn," the analyst said.

Keppel O&M and SembMarine's rig orders from Sete Brasil were respectively pegged at US$823 million and US$792 million per piece.

OCBC Investment Research warned of impairment charges to be taken on the book values of the rigs if they were to be sold to other companies at under the contracted prices.

This article was first published on JAN 20, 2016.
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