The threat of bankruptcy hanging over a Brazilian energy company could bring huge financial problems to Keppel and Sembcorp Marine.
Both companies could be forced to reverse billions of dollars in revenue and profits, and make costly impairments if Sete Brasil, their largest client for deep-water rigs, files for bankruptcy protection.
Keppel has orders for six semi-submersible rigs from Sete Brasil worth $6.2 billion while SembMarine has seven drillships worth $7 billion in total on its order books from the company.
The orders were secured in 2011 and 2012, when the energy sector was booming.
Analysts estimate that each company has recognised $1.5 billion to $2.5 billion of revenue, and the unrecognised portions make up about 40 per cent of their order books.
Neither has been paid by Sete Brasil since November 2014 after the company failed to secure long-term financing amid allegations of kickbacks involving state-run oil producer Petrobras.
Analysts also note that Sete Brasil has been working to get a restructuring plan in place, including roping in equity partners to jointly own the rigs and reduce the new-build programme from 29 vessels to 14 or 15.
This could salvage Sete Brasil from liquidation, said DBS analyst Ho Pei Hwa, but the Singapore rig-builders might have to negotiate with Petrobras on orders and charters.
"We believe the seven rigs out of 13 total rig orders that have begun construction have lower risks of cancellation. The remaining six rigs (worth about $1 billion each), on which construction work has yet to commence, could be vulnerable to cancellation. We are wary of price renegotiation and yards having to finance the rigs," she added.
Maybank Kim Eng reiterated its negative call on offshore marine. "The prospects of Keppel and SembMarine receiving payments now look increasingly bleak. In our view, the worst-case scenario of almost all rig contracts being eventually terminated may now be a possibility," analyst Yeak Chee Keong said.
OCBC Investment Research warned that if there is a complete cancellation of all the Sete Brasil rigs, there could be impairments if the vessels are sold to other companies at prices below the original contracted price of about US$800 million (S$1.1 billion) each.
UOB KayHian analyst Nancy Wei said SembMarine could see a huge loss this year from the impact of cancelled Sete Brasil orders and rig value write-downs, but Keppel's hit could be mitigated by earnings from its property business.
"However, we would have to lower our earnings forecasts in view of a loss of future revenue from the unbuilt rigs," added Ms Wei.
Macquarie downgraded its call on Keppel to underperform from outperform, in view of further risks if marine orders start getting cancelled, adding that its dividend payout could be in jeopardy.
"Even if rig orders come back in 2018, Keppel will not be at the front of the row as global rig orders dry up through 2017, and especially as jack-ups, a segment that Keppel dominates, may have entered a prolonged downcycle due to heavy oversupply," Macquarie said.