News analysis

Restructuring move lauded but uncertainty still looms

Keppel Corporation is already moving to restructure its business, just days after releasing its full-year results. The conglomerate announced early yesterday that it plans to merge its $26 billion worth of asset management businesses in a new and wholly owned subsidiary, Keppel Capital Holdings.

Analysts have lauded the move as it means KepCorp will be able to make investments on a larger capital base without relying solely on its balance sheet. But uncertainty still looms, especially where its dealings with Brazilian rig-building client Sete Brasil are concerned.

KepCorp chief executive Loh Chin Hua said the group has stopped work on projects for Sete Brasil and made a hefty $230 million provision for possible write-downs.

This comes as Sete Brasil, which is embroiled in the broader corruption scandal surrounding state oil company Petrobras, teeters on the brink of bankruptcy amid the plunge in oil prices. It has failed to make payments to KepCorp for over a year.

Insult was added to injury last week when the Brazilian firm postponed a meeting on restructuring, with no new date set, according to Bloomberg. Put simply, KepCorp's road to recovery in the oil-rig market could well be longer and rougher than it seems.

The Sete Brasil issue dominated the question-and-answer session at KepCorp's results briefing last Friday, as analysts and reporters alike tried to draw out more details on the group's stance. These included questions on how the sum for the provision was arrived at, as well as KepCorp's contingency plans should Sete Brasil declare bankruptcy.

But the management did not give away much more detail, explaining only that it had made the decision on the $230 million charge after assessing the "construction progress, payment status and amounts due to vendors, among other areas".

Mr Loh said the group has come up with "a strategy for dealing with different scenarios", although he stopped short of revealing the plans.

"We understand that Sete's board will soon be meeting to discuss future plans for the company. It remains unclear when a final decision will be taken," he said.

"Until we hear from Sete officially and the situation and options available to us become clearer, the above measures, in our opinion, are sound and adequate."

KepCorp has taken a huge hit in recent quarters, as plunging crude prices forced oil majors and national oil firms to slash capital spending.

Net profit slid 19.1 per cent to $1.52 billion for the full year, while revenue dropped 22.5 per cent to $10.3 billion, dragged down by the group's offshore and marine segment.

The losses were mitigated by gains in its other businesses. For instance, even as profit for offshore and marine fell 54 per cent, earnings for property jumped 45 per cent to $701 million, while those from investments hit $136 million.

Clearly, KepCorp's multi-business strategy, which it has been working hard to build, is working, although it remains to be seen whether the investment community, which has long known the group as a rig-building giant, will come to recognise this.

The group said a unit of Keppel Offshore & Marine yesterday made its first rig delivery this year for Gulf Drilling International, which renewed options for two more rigs for deliveries in 2018 and 2019.

But this is far from being the turning point, with oil prices expected to stay depressed for some time to come.

Ms Carmen Lee, head of OCBC Investment Research, noted in a recent report that KepCorp could see even more write-downs from its new-build jack-up rig contracts, in addition to those from Sete Brasil.

"We estimate that there are about 21 jack-up rigs in the group's order book, of which about 12 are at risk of provisions. They have been mostly deferred by requests from customers, and should oil prices stay low, we believe that the risk of further delays or even cancellations will rise."

Until the financial black hole surrounding Sete Brasil reveals itself more clearly, the uncertainty enveloping KepCorp's offshore and marine business will likely remain.

A version of this article appeared in the print edition of The Straits Times on January 26, 2016, with the headline 'Restructuring move lauded but uncertainty still looms '. Print Edition | Subscribe