Both KEP and SMM halted.
There’s a briefing by KEP at 6pm. NO invite by SMM yet.

Possible scenarios
1) KEP to divest Parts of O&M to SMM . Good for KEP (depending on the price), negative for SMM in the short-term (balance sheet weak) but positive long term

KEP O&M was in negative equity at end Dec 2020 of S$659m. This should gradually improve with the latest order win from Petrobras, and order book of S$6bn.

Recap of KEP recent outcome of O&M review where the division is split into 3 segments:-
– Rig Co (transitional arrangement): Keppel O&M’s completed rigs, which include five jack-up rigs for Fecon, Clearwater, TS Offshore and its Can-do drillship, will be placed under the Rig Co.
These assets will be put to work, or sold if there are suitable opportunities. A dedicated team will be appointed to support its chartering and marketing activities.
As the oil market recovers, utilisation and day rates improve, and the rigs generate steady cashflow, the Rig Co will sell the rigs or collaborate with Keppel Capital to seek funding from external investors.
A cashflow-generating Rig Co can be monetised or spun off in the future. The Rig Co is expected to be self-sustaining and would only require limited initial funding.

-Dev Co: Uncompleted rigs, which include five jack-up rigs for Borr Drilling and two semi-subs for Sete Brasil and Awilco, will come under the Dev Co. Kep O&M will focus on completing these rigs, while prudently managing cashflow.
Priority will be given to completing rigs that have firm contracts with customers. The Dev Co will be wound up once the rigs have been completed and delivered to customers or transferred to the Rig Co, where they will be put to work or sold.
The Dev Co would require some initial funding from Keppel, after which it is expected to operate independently.
The Rig Co and Dev Co are collectively expected to require about S$500m in net funding, mainly for the latter to complete the rigs. This will be provided progressively by KEP and repaid over time.

-Op Co: The Op Co, comprising the rest of KEP O&M, will progressively transit to a developer and integrator role, focusing on design, engineering and procurement.
It will be people-light and asset-light, with fabrication work subcontracted to its eco-system of three contractors, including other yards. KEP O&M’s yard operations will be streamlined, including by repurposing or divesting part of its global network of yards.
The Op Co will exit the offshore rig-building business and progressively exit low value-adding repairs and other activities with low bottom line contribution.
It will seek opportunities in floating infrastructure and infrastructure-like projects that can deliver predictable streams of cashflow, including renewables projects,
such as offshore wind farms and solar farms, gas solutions, production assets and new energy solutions such as hydrogen and tidal energy.

2) Joint entity that both SMM and KEP have stakes in, involving share swaps.  
– Negative for KEP as they have mentioned to go ‘asset light’ and exit rig. 
Negative for SMM in the short-term (balance sheet weak) but positive long term

We have an Add call on KEP (TP : S$6.40) and Hold call on SMM (TP: S$0.226)

Siew Khee LIM
Head, Singapore Research
Strategy | Industrials | Energy | Utilities | Transportation  
CGS-CIMB Research
Tel: +65 6210 8664