Keppel Corporation - OCBC Investment 2017-03-22: Quality never goes out of style

Keppel Corporation - OCBC Investment 2017-03-22: Quality never goes out of style KEPPEL CORPORATION LIMITED BN4.SI

Keppel Corporation - Quality never goes out of style

  • Five jack-up rigs novated to new buyer.
  • US$216m/rig now vs. US$219m in 2013.
  • Deliveries brought forward.

Resolution for Transocean rigs 

  • With the approval of Transocean, Keppel FELS has entered into a Heads of Agreement with Borr Drilling Limited whereby the construction contracts for five jackup rigs currently being built for Transocean will be novated to Borr Drilling.
  • The transaction is subject to all three parties executing definitive agreements and satisfying formal closing conditions; completion is expected by end of May 2017.

Prices resilient; delivery dates brought forward 

  • Recall that in 2013 Transocean had ordered five KFELS Super B Class jackup rigs from Keppel FELS for US$1.1b and made a 20% down payment. Under the new agreement, Borr Drilling will take over the contracts and undertake the remaining instalments to Keppel.
  • The price for each rig is USD$216m (vs. original price of USD$219m), and we believe this resilience in pricing probably took some in the market by surprise. Borr will also make a down payment of USD$275m, leaving ~US$580m left to be paid. 
  • The delivery dates of the five rigs were originally between 2016 and 2017 but had been deferred by Transocean to 2020. The first three rigs will now be delivered between 2017 and 2018, with the remaining two in 2020. This improves Keppel’s cashflows and minimises project risks.

Who is Borr Drilling? 

  • Borr is a cash-rich start-up backed by London-based investor Tor Olav Troim, the former righthand man of shipping and offshore billionaire John Fredriksen. After the recent US$130m purchase of two jack-ups (also built by Keppel) from now-bankrupt Hercules Offshore, Troim is expected to grow his fleet further by capitalising on low asset prices.

More opportunistic purchases 

  • We are starting to see more instances of opportunistic purchases of rigs (e.g. Maersk Highlander, Hercules Resilience, Hercules Triumph, Deepsea Metro II UDW drillship, UDW drillship Cerrado), and expect that buying interest would be higher for best-in-class assets such as those with the Keppel and Sembmarine brand. 
  • Maintain BUY with S$7.40 fair value estimate on Keppel Corp; risks include lower oil prices due to higher-than-expected supply from US shale and failure of OPEC to extend production cuts in 2H17.

Low Pei Han CFA OCBC Investment | 2017-03-22
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 7.400 Same 7.400