Looking Beyond Backyard Doesn't Pay for Singapore Rig Builders

(Bloomberg) -- This week, two of Singapore’s blue-chip companies could learn that it doesn’t pay to expand too far afield.

Keppel Corp., the world’s largest builder of oil rigs, could post its lowest annual profit in seven years when it reports earnings Thursday, according to analyst estimates. That same day, shareholders of key customer Sete Brasil Participacoes SA are set to discuss whether it should file for bankruptcy protection after plunging oil prices slammed demand for drilling equipment at the South American company, which is also embroiled in a corruption probe.

The earnings briefing may shed light on the extent of troubles their Brazilian client poses to Keppel and Sembcorp Marine Ltd., the world’s two biggest oil-rig builders, which haven’t been paid by Sete Brasil since November 2014. Analysts are predicting further profit declines this year for both companies, which have $10.5 billion worth of orders for semi- submersibles and drill ships from Sete Brasil at risk of being cancelled, according to a Jan. 7 report from Nomura Holdings Inc.

“Brazil is a concern, especially if Sete Brasil goes bust,” said Hugh Young, Singapore-based managing director at Aberdeen Asset Management Plc. “We’re riding this out.” Aberdeen is Keppel’s third-largest shareholder, with 5.79 percent of its stock, according to data compiled by Bloomberg.

Declining Earnings

Keppel will probably report that net income fell 23 percent to S$1.45 billion ($1 billion) in 2015 and will drop further to S$1.36 billion this year, according to the average of seven analyst estimates compiled by Bloomberg in the past four weeks.

Sembcorp Marine warned in December it will post a fourth-quarter loss and a “significant decline” in 2015 profit. The company could report Feb. 15 that full-year net income fell 65 percent to S$196 million, according to the average of nine estimates.

Plunging oil prices have dragged down orders at Sembcorp Marine, which earns almost all its profit from building oil rigs, and Keppel, which gets about half its profit from that business. Crude oil briefly fell below $30 a barrel last week and is speculated to slump as low as $15 in 2016. Both companies announced plans in 2010 -- when crude was trading above $80 a barrel -- to build new yards in Brazil.


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Copyright 2016 Bloomberg News.

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