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.