Selling the rigs will be tough in this market.
There are few avenues open to Singapore’s largest rig builders in the event that Sete Brasil, their largest customer, ends filing for bankruptcy protection.
According to Pei Hwa Ho, equity analyst at DBS Vickers, Singapore rig builders are buffered by the 65% collection of contract value of first seven rigs, in the worst case scenario that Sete files for bankruptcy protection.
Ho noted that it might make more sense for the rig builders to continue building the units which are already at advance stages and sell them in the market. Given weak market sentiment, however, continuing construction would require millions of dollars of working capital from each yard. Selling the units will also be tough, and it is uncertain whether either of the rig builders will be able to profit from such a sale.
In addition, Sete Brasil’s imminent bankruptcy also raises concerns if the rig builders are required to write down the value of their yard facilities in Brazil.
Ho said that Sembcorp Marine will be more adversely affected because it has invested $1bn for its new Brazilian yard over the past 3 years. On the other hand, Keppel should be less affected given its Brazil yard is a relatively old facility acquired over 10 years ago.
Singapore’s rig builders took hefty impairments for the Sete Brasil projects in the fourth quarter. Keppel made provisions of $230m for the Sete Brasil projects in Q4, after accessing the construction progress, payments received, receivables from Sete Brasil and payables to vendors, among others.
On the other hand, Sembcorp Marine made $329 million in impairments for its Sete Brasil drillship projects in FY15. SembMarine warned that the current down-cycle will be "more protracted than previous cycles".
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