Singapore rig builders feel impact of oil price slide

Problems in the Brazilian and Mexican oil industries unleashed by the plunge in crude prices have ensnared two pillars of Singapore Inc - rig builders Keppel Corporation and Sembcorp Industries - and through them Temasek, the state investment fund that is the largest shareholder in both groups.

Arms of Keppel and Sembcorp, both shipbuilders, have received massive orders for rigs from Latin America in recent years. Now though, the fall in oil prices means not only that new orders are weak but that many existing contracts may be renegotiated.

Keppel and Sembcorp have been accused of paying bribes in the corruption scandal that has engulfed Petrobras, Brazil's state-controlled oil producer. Keppel said in February its Brazilian unit was not involved in the scandal, and Sembcorp denied its local subsidiary had made illegal payments.

More broadly, the plight of the Singapore yards since the 40 per cent-plus fall in crude prices began last summer shows how the distress in the oil industry is spreading from major explorers and producers to their suppliers. A supply glut is emerging in the rigs market.

As much as 30 per cent to 50 per cent of the backlog in orders for the Singaporean yards may ultimately be cancelled, say analysts. If the yards attempt to sell these rigs on the open market, the discount would likely be painful and could dent their share prices.

"We expect the emergence of distressed asset sales to further disrupt the already weak newbuilding market as potential buyers shop around for better deals versus [giving] direct orders to Keppel," said Nomura analysts.

Problems are dire in Brazil, which accounts for a big part of both Keppel's and Sembcorp's order books.

Not long ago, Petrobras, was the largest user of deepwater rigs and accounted for 20 per cent of global demand for these expensive pieces of equipment.<

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Now a combination of the supply glut and investigations into allegations of corruption at Petrobras mean that virtually all commissions of new orders have ground to a halt, and there is uncertainty about the fate of existing contracts.

The Petrobras scandal centres on allegations that former directors conspired with contractors and scores of politicians to siphon millions of dollars from the company.

But investor optimism has been rising that Petrobras will emerge from the scandal without defaulting on its large debt load. Petrobras last week released long-delayed 2014 financial results - a move that was seen as essential to avoid a technical default on its $106bn of net debt.

Accusations the Brazilian units of Keppel and Sembcorp were involved in paying bribes in the scandal were made by Pedro Barusco, a former director of Sete Brasil, a leasing company responsible for supplying rigs to Petrobras.

Sete Brasil placed large orders with Keppel and Sembcorp, but has not made payments to the shipbuilders since November. Keppel has rig orders worth more than $5bn in Brazil which have not yet been delivered, while Sembcorp has contracts valued at $5.6bn.

Keppel "could see a delay in receiving payments from Sete Brasil or worse still order cancellations", said analysts at OCBC.

Sete Brasil, which is negotiating a bridge loan with banks, did not respond to requests for comment. Petrobras also did not respond.

Keppel said: "In Brazil, the offshore and marine industry is facing unprecedented challenges. BrasFELS, our yard in Brazil, is responding to the challenges by managing carefully its resources and operational costs."

SembCorp's marine unit said: "Sembcorp Marine has seven drillships on order from Sete Brasil. The projects' execution [and] payment activities were in line with contract terms until recently."

Meanwhile in Mexico, the situation is more complicated. Faced with safety, maintenance and efficiency challenges, Pemex, the state-controlled Mexican oil explorer, began to modernise its equipment and lift productivity in 2011.

As part of that programme, both Singaporean shipyards received major orders from two contractors to Pemex - Oro Negro and Grupo R. Among the biggest shareholders in Oro Negro is Temasek.

Pemex is trying to renegotiate the terms of the existing contracts on some rigs and asking for a discount on the agreed prices, say people familiar with the matter.

"Sembcorp Marine remains comfortable with the progress and execution of our contract order book. Many of our customers are established international offshore rig owners and operators with long term plans to renew and upgrade or refocus their offshore fleet," said Sembcorp's marine unit.

Keppel said: "Our healthy order book of $12.5bn provides us a cushion to ride out this down cycle . . . For customers who seek to defer their rig deliveries, we will review and reallocate our work schedules and resources to minimise any impact on us."

Temasek said: "We never comment on the business operations of the companies in which we hold stakes."

Additional reporting by Samantha Pearson

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