Keppel Corporation - CGS-CIMB Research 2019-02-20: Rig Delivery A Sign Of Market Recovery


Keppel Corporation - Rig Delivery A Sign Of Market Recovery

  • Keppel FELS delivered a jack-up rig, Cantarell IV to Grupo R on a 5-year sale and leaseback agreement at US$179m.
  • Positive: A rig delivered is better than a rig in the yard.
  • Negative: The end customer for the rig charter is Pemex which is facing funding constraints.
  • Maintain ADD with an SOP-based Target Price of S$8.41.
  • Catalysts include stronger recovery in the O&M industry and settlement of Sete Brasil semi-subs.

Rig delivered on sale and leaseback arrangement

  • Keppel FELS has delivered the jack-up rig Cantarell IV to Grupo R. Keppel will purchase the rig for US$179m, which is equivalent to the balance contract value of the rig (previously contracted at US$220m).
  • Cantarell IV will be leased back to Grupo R on a bareboat charter at competitive day rates over five years. IPC, the parent company of Grupo R will provide a guarantee.
  • Grupo R has the right to buy the rig at a pre-agreed price during the term. After the 5th year, Keppel may also sell the rig to Grupo R at a pre-agreed price.
  • The rig will be deployed directly offshore of Mexico, under an integrated drilling contract for offshore wells by IPC with Pemex, starting early May 2019.

A rig delivered is better than a rig in the yard

  • We view the delivery positively as it suggests that there is demand for rigs, although a full payment is much preferred.
  • Assuming a return of 15% on the sale and leaseback arrangement, we estimate the bareboat charter rate that Keppel is charging works out to be c.US$50k/day. The bareboat charter payment will be paid regardless of actual rig utilisation. Keppel could receive up to US$18m (S$24m) of charter income p.a. from the deal. Note that Keppel O&M generated finance income of S$54m in FY18, mainly from deferred delivery.
  • The minimum average long-term time charter rate of jack-up rigs in Mexico is about US$95k/day currently. Vantage Drilling recently chartered out a 350ft jack-up to Eni at US$90k/day for Mar 2019 to Feb 2022.

What if customers cannot pay?

  • There is a risk that Pemex is unable to pay the time charter which would have a ripple effect on Keppel in our view. Keppel could re-deploy the charter although this could be cumbersome.

Six more rigs up for delivery

  • Excluding the eight units for Borr Drilling, Keppel still has six outstanding jack-up rigs for delivery (one each for Clearwater and Grupo R, three units for Fecon and one for TS Offshore). We believe sale and leaseback/securitisation of rigs could be the next options for these rigs.

Maintain ADD with a Target Price of S$8.41

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-20
SGX Stock Analyst Report ADD MAINTAIN ADD 8.410 SAME 8.410