Monday, February 16, 2015

Is the Brazil bubble bursting and bringing Keppel and Sembcorp along?

There is plenty of bad news coming out of Brazil and this will impact Singapore's rigbuilders Keppel Corp and Sembcorp Marine. The national oil company Petrobras is being caught in an ongoing corruption probe that has seen its CEO resign and international suppliers such as Keppel and Sembcorp implicated. Sete Brasil, formed by a group of Brazilian companies to run the offshore rigs working in Brasil has difficulty obtaining financing. As a result, Sembcorp and other rig and shipbuilders have not received payment

If Petrobras and Sete Brasil do not sort their issues out in time, it will mean earnings downgrade for the two Singapore stock exchange heavyweights. Sembcorp is much more exposed to the rumble in the Brazilian jungle. Half its net order book comprises drillships ordered by Sete Brasil. Both Singapore rigbuilders have also invested in setting up a yard in Brazil to meet the country's local content requirement.

In the current low oil price, a swift and favourable resolution looks less likely. For Petrobras, it may have to halve its grand plans for the futures due to the massive amounts siphoned out of the country when contracts were awarded. For Sete Brasil, it too is implicated by the corruption probe at Petrobras as funding/financing from the banks have been stopped until it agrees to anti-corruption covenants. 

I do not think Keppel and Sembcorp were foolish to enter into Brazil. The history of Latin America has been riddled with charges of corruption and financial malaise. If Keppel and Sembcorp stayed out of the Brazill-Petrobras party, its shareholders would have questioned the sanity of the directors. After all, when the drillship orders were made, oil prices were USD 100-120 per barrel. Damned if they do, damned if they don't.


  1. im no oil expert but i have been slowly reading up, on those folks working in the industry, on what folks renown to do deep work say, on this brazil situation. i think a lot of folks have forgotten that rig building is a long cyclical cycle. the data from jp morgan report shows something along this line. what if majority of the old rigs have been replaced. bear in mind many of the rigs used for 30 years. so it could be some time before they need replacing. i will probably publish the consolidate idea soon.

  2. Kyith, thanks for the comment but I am not sure the point of your comment, especially the part where you say "folks have forgotten that rig building is a long cyclical cycle".

    If you need to consolidate some ideas, I will suggest you look at the different categories of rigs with in the market. The ones that Sembcorp is building for Sete Brasil are very modern and most of the current fleet of drillships are not able to work at the water depths (ultra deep) offshore Brazil. Replacement (correction of supply) probably will not improve the market by much. The main pressing problem for the rig builders is on the demand side as Sete Brasil cannot get financing.

    To be fair, for Sembcorp, of the 5-6 drillships ordered (which make up for more than USD 4.8 billion of its net orderbook), it probably only built the hulls of the first two drillships, which is part of its original intention. If Sete Brasil enters into default, Sembcorp could finish building the first two rigs and sell it on the market.

    However, the bigger hit will be to its net order book but perhaps the market has already discounted this into Sembcorp's share price as it has been one of the worst performers.

    With respect to the risk of Sete Brasil facing problems, let's just say it won't be the first time in recent years that a Brasil oil and gas company ran into trouble. OGX/OSX has the dubious honour.