Keppel Corp - RHB Invest 2017-03-22: Three Way Agreement For Transocean’s Jack-Up Rigs

Keppel Corp - RHB Invest 2017-03-22: Three Way Agreement For Transocean’s Jack-Up Rigs KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corp - Three Way Agreement For Transocean’s Jack-Up Rigs

  • Keppel announced that it has entered into an HOA with Borr Drilling, which will see the Norway-based drilling contractor take over Transocean’s five jack-up rigs that are under construction. 
  • We believe this would provide visibility to Keppel’s delivery schedule, minimise potential project risk and improve its cash flow. We upgrade earnings by 3%, as we adjust our O&M orderbook earnings by 3% for FY17. 
  • Maintain BUY with a higher SOP-based TP of SGD7.77 (from SGD7.39, 14% upside), implying an FY17F P/E of 10.6x.

Salient details. 

  • Keppel Corp (Keppel) has entered into a heads of agreement (HOA) with Norway-based Borr Drilling, which will acquire five of Transoceans’s jack-up rigs that are currently being built by Keppel. 
  • The current price of each rig is USD216m, compared to the original price of USD219m paid by Transocean in 2013. Borr Drilling will also pay a down payment of USD275m to Keppel.

Order back in 2013. 

  • Recall that Transocean ordered the five jack-up rigs from Keppel in 2013 to be delivered in various stages from 1Q16 to 2H17. However, the slowdown of the jack-up rigs market forces Transocean to defer the delivery of the new rigs until 2020.

New agreement. 

  • Under the new arrangement, Keppel will deliver three rigs to Boors drilling between 2017 and 2018, while the other two rigs are to be delivered in 2020. 
  • According to Upstream, Borr Drilling will acquire the entire jack-up fleet of Transocean, which consisted of 10 current rigs and the five new rigs which are under construction at Keppel.

Impact to Keppel. 

  • We believe the new arrangement with Borr Drilling should allow Keppel to breathe a sigh of relief, finally getting some visibility on the deferred jack-up rigs. 
  • The agreement would also enable Keppel to improve its cashflow and minimise the risk of further impairments to its balance sheet.

Outlook for O&M. 

  • Keppel’s O&M orderbook stands at SGD3.7bn. It is shifting the focus of its offshore & marine division to LNG- and gas-related technologies, specialised vessels, repurposing offshore technology, and repairs and conversions. 
  • We expect Keppel to secure SGD800m worth of new contracts in FY17, higher wins than our expectation would provide further earnings upside potential.

Maintain BUY. 

  • Its property and infrastructure arm should continue to play an important role in driving its earnings in the near to mid term, focusing on its key markets of Singapore, China and Vietnam. 
  • We upgrade FY17 earnings by 3% as we adjust our orderbook delivery assumption for FY17. 
  • Maintain BUY with a higher SOP-based TP of SGD7.77, which implies 10.6x FY17F P/E.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-22
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 7.77 Up 7.390