Keppel, Sembcorp Marine settle with Sete Brasil over billions in frozen rig orders

Keppel O&M is in discussions with Magni Partners on the terms to complete the construction of the drilling rigs Urca (pictured) and Frade.

SINGAPORE - Keppel Corp and Sembcorp Marine on Monday (Oct 7) have reached long-awaited settlements with Sete Brasil for oil rig-building contracts worth billions of dollars that were frozen after their once biggest customer was forced to file for bankruptcy amid a sweeping corruption probe in Brazil.

Keppel in an exchange filing before trading began on Monday morning said its Keppel Offshore & Marine (Keppel O&M) unit will take control of four uncompleted oil drilling rigs and is in discussions to complete the building of two remaining rigs.

Keppel had received US$1.3 billion (S$1.7 billion) in progress payments from Sete Brasil for the six rig orders, which had a total contract value of about US$4.9 billion, before payments stopped in November 2014. Keppel stopped work on the rigs in late 2015.

For four rigs, the engineering, procurement and construction contracts and related agreements entered into with Sete Brasil subsidiaries will be deemed to be amicably terminated, with no penalties, refunds and/or any additional amounts being due to any party. Both side have also waived all rights to any claims.

Of those four rigs, work on one is 40 per cent completed, a second is 21 per cent finished while the other two are below 10 per cent completed.

When the settlement agreement takes effect, Keppel O&M unit Fernvale will have full ownership of the four rigs, and will explore various options to extract the best value from these assets, Keppel said.

For the two remaining rig orders, a total sum of close to US$260 million (S$358.8 million) will be recognised as part of the undisputed debt included in debt-ridden Sete Brasil's court-approved restructuring plan. The amount will be paid to Fernvale proportionally and on equal footing with the other creditors of the Sete Group.

Fernvale is also in discussions with Magni Partners (Bermuda) Ltd on the terms to complete the construction of the two drilling rigs, which are about 92 per cent and 70 per cent completed respectively for Sete Brasil units Urca and Frade. Magni Partners' winning bid to purchase four Sete Brasil subsidiaries, including Urca and Frade, was approved at a meeting of Sete Brasil's creditors on Oct 3, said Keppel.

The settlement agreement was also approved at this meeting. Keppel noted that the agreement will only become effective upon the fulfilment of other conditions precedent, including the successful sale of Urca and Frade by Sete Brasil to Magni Partners.

"When the settlement agreement becomes effective, Keppel O&M would be able to resolve a long outstanding issue related to the six rigs, and look forward to exploring other opportunities to contribute to the oil and gas industry in Brazil," said Keppel.

In a filing during the midday trading breack on Monday, Semcorp Marine said its seven rig contracts with Sete Brazil subsidiaries worth a total US$5.6 billion will be terminated and the parties will mutually release each other from all claims in relation to the contracts. This is subject to certain prior conditions being fulfilled.

Sembcorp Marine received a total of $2.7 billion in progress payments for the rigs before payments stopped in November 2014.

For five of the seven rigs, Sembcorp Marine will keep all works performed.

The remaining two have made the most construction progress, and will be split between Sembcorp and Sete Brasil in proportion to payments already made by Sete Brasil. Sete Brasil has identified a buyer for its units that own the two drillships. The buyer is expected to negotiate with Sembcorp to enter new contracts to complete the drillships.

Following the settlement, the parties will terminate arbitration proceedings for contract claims begun in April 2016. Sembcorp Marine said it will make further announcements when all the conditions precedent have been fulfilled and the settlement agreement has become effective.

Keppel Corp booked a further $81 million provision in its 2017 fourth-quarter financial results for losses made on its Sete Brasil rig-building projects on top of a previous $230 million provision announced in Q4 2015. Sembcorp Marine made impairment and provisions of $329 million for the drillship projects during its fiscal year ended Dec 31, 2015.

Keppel O&M also agreed in late 2017 to pay fines amounting to US$422.2 million with criminal authorities in the United States, Brazil and Singapore in relation to bribes made by a former agent in Brazil to win 13 contracts with Brasil state oil giant Petrobras and its main rig supplier Sete Brasil.

Following the settlement announcements on Monday, Keppel Corp shares traded up $0.07 or 1.2 per cent to $5.878 as at 2:30pm, while Sembcorp Marine's shares were up $0.01 or 0.9 per cent to $1.19.

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