Here’s why the Sete Brasil bankruptcy crushes hopes of new orders even after oil price rally

The dry spell in orders could extend by two years.

While Sete Brasil’s investors filing for bankruptcy is anything but a surprise, its lasting effect might lead to some disappointed investors expecting robust orders after the oil price rally.

According to a report by Maybank Kim Eng, the recent Sete Brasil development could be the spark plug to a slew of contract deferments and cancellations.

Maybank Kim Eng adds that while oil prices have rebounded from its January abyss, this is still not enough to induce confidence for investments in new rigs.

“Instead, we see weak order replenishment over the next two years, expecting zero drilling rig orders for the rigbuilders,” Maybank Kim Eng said.

Meanwhile, Maybank Kim Eng adds that it might be necessary for orders to be removed from rigbuilders’ orderbooks.

“The unrecognised portion of Sete Brasil contracts account for c.40-45% of Keppel’s 1Q16 net orderbook of SGD8.6b and SMM’s net orderbook of SGD10.4b. So far, 3 units each for both rigbuilders are 50-90% complete while the other 3 for Keppel and 4 for SMM are less than 30% complete,” Maybank Kim Eng said.

“We think some of these orders, especially the last 3-4 units, may be axed and could be removed from their orderbooks. Nevertheless, we had already removed all Sete Brasil revenue recognition in our forecasts,” they added.

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