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

KEPPEL CORPORATION LIMITED (SGX:BN4)

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.

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.

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.

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.

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.

Catalysts for KEPPEL CORPORATION LIMITED (SGX:BN4) include final resolution of M1 LIMITED (SGX:B2F), settlement of Sete Brasil rigs and stronger-than-expected offshore & marine recovery.
A downside risk is sudden plunge in oil price.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-20

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