• Keppel Corporation (Keppel) has entered into an amended and restated framework deed with Borr Drilling (Borr). Keppel Offshore & Marine (KOM) will accelerate the delivery of three yet-to-be delivered jackup rigs to Borr between October 2022 and July 2023.
• Resolution for the five rigs will de-risk KOM’s inventory and deleverage KOM. All three jackup rigs will be delivered with full payments on delivery, amounting to at least US$352mn, out of which at least US$158mn will be payable in 2022.
• KOM secured repeat newbuild Floating Production, Storage and Offloading vessel (FPSO), for about US$2.8bn, which brings its new orderbook to about S$11.8bn. We believe latest contract win enhances proposition of KOM-Sembcorp Marine (SMM) merger.
• Maintain BUY with unchanged SOTP TP of $8.95. We valued the Group based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward. Our TP translates to about 1.2x FY22e book value, a slight premium to its historical average as the Group’s transformation plans gain traction and ROE expands to 8.8%. Catalysts expected from approvals obtained for the transaction.

The news

Keppel has entered into an amended and restated framework deed with Borr. Under the new framework deed, KOM will accelerate the delivery of three yet-to-be delivered jackup rigs to Borr between October 2022 and July 2023. There are five rigs that have not been delivered yet.

The five rigs form part of the identified assets that are slated to be transferred to RigCo as part of the agreements in connection with the proposed combination of KOM and SMM. The deliveries of the remaining two rigs will be deferred to 2025 in which Borr will pay holding costs and cost cover in respect of the deferred deliveries.

Positives

+ Resolution for five rigs will de-risk KOM’s inventory and deleverage KOM. Keppel will receive cash payments earlier, which will reduce its overall financial exposure to Borr. All three jackup rigs will be delivered with full payments (including holding costs and cost cover) on delivery, amounting to at least US$352mn, out of which at least US$158mn will be payable in 2022. The new resolution will enable KOM to receive full payments for the three rigs faster, improve its cash flows, reduce counterparty risk and provide a resolution to its legacy rigs. The sale proceeds will be transferred to Asset Co upon completion of the combination, in line with the framework agreement.

+ No impairment will be recorded for third deferral of two of the five undelivered jackup rigs. The remaining two of the five undelivered jackup rigs will have their scheduled deliveries to Borr deferred to 2025. Recall that KOM and Borr had previously agreed on the deferral of the delivery of these five jackup rigs twice. Borr will pay holding costs and cost cover in respect of the deferred deliveries.

+ KOM secured repeat newbuild FPSO contract P-83 worth US$2.8bn from Petrobras, net orderbook rise to ~$11.8bn. The P-83 scheduled for delivery in 1H27, is a repeat order of the P-80 FPSO that KOM secured in August this year. The P-83 and P-80 is a larger FPSO  compared to the P-78, which was awarded in May 2021. The P-83 and P-80 has a larger production capacity of 225,000 barrels of oil per day (bopd) vs. the P-78’s 180,000 bopd.

We believe the latest contract win will enhance the proposition of the KOM-SMM merger as the orderbook under KOM will all be subsumed under the new entity – Bayberry.

Source: Phillip Capital Research - 13 Oct 2022