Keppel positions for global energy transition, announces bold transformation of offshore & marine business

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escveritas
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Keppel positions for global energy transition, announces bold transformation of offshore & marine business

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  • Keppel Offshore & Marine will seize opportunities as a developer and integrator of offshore energy and infrastructure assets and exit the offshore rig building business.
  • The company will be restructured into three parts, separating construction and ownership of legacy drilling rig assets from its core operations, which will be slimmer, asset-light and people-light.
  • Keppel continues to explore inorganic options for its offshore & marine business
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28 Jan 2021

Keppel Corporation (Keppel) announced today that amidst the global energy transition and major disruptions facing the oil industry, the Company will carry out a comprehensive transformation of its wholly-owned subsidiary, Keppel Offshore & Marine (Keppel O&M), to better align it to Keppel’s Vision 2030. This is part of Keppel’s strategic review of its offshore and marine (O&M) business, with the goal of creating a slimmer, and more competitive Keppel O&M that is well-placed to support the energy transition, even as Keppel continues to explore inorganic options.

Reflecting Keppel’s commitment to sustainability and combating climate change, Keppel O&M will exit the offshore rig building business, after completing the existing rigs under construction. In line with the Group’s more disciplined approach towards capital allocation, Keppel O&M will not undertake any new project requiring large upfront capex or without milestone payments. It will also progressively exit low value-adding repairs and other activities with low bottom line contribution, and focus on higher value-adding work.

Mr Loh Chin Hua, CEO of Keppel Corporation and Chairman of Keppel O&M said, “The share of renewables and new energy solutions in the global energy mix has been growing rapidly, driven by environmental concerns as well as technological advancements and the declining cost of renewables. Natural gas, as a transitional fuel, is also projected to overtake oil as the world’s largest energy source in the years to come. To seize opportunities in this fast-changing environment, we are making bold and decisive moves to transform Keppel O&M to ensure that it remains relevant and competitive, and fully aligned to Keppel’s Vision 2030.

“We are also exploring inorganic options for the O&M business, but there is no assurance that any transaction will materialise. In the meantime, we believe that our organic restructuring of Keppel O&M will not only enhance its competitiveness, but also its attractiveness, if we were to undertake any inorganic action.”

Restructuring of Keppel O&M

As part of the transformation, Keppel O&M’s business will be restructured into three parts: a Rig Co and a Development Co (Dev Co), which will be transient entities created to hold its approximately S$2.9 billion worth of completed and uncompleted rig assets; and most importantly, an Operating Co (Op Co), comprising the rest of Keppel O&M, which will be transformed into an asset-light and people-light developer and integrator of offshore energy and infrastructure assets. With a healthy balance sheet and undistracted by its stranded rig assets, the Op Co, which has a strong net order book of S$3.3 billion, 82% of which is in renewables and gas solutions, will seize opportunities in the energy transition, and is expected to be self-sustaining, financially independent and profitable over time.

Rig Co: Keppel O&M’s completed rigs will be placed under the Rig Co, which will put the completed rigs to work, or sell them if there are suitable opportunities. A dedicated team will be appointed to support its chartering and marketing activities. This will only be a transitional arrangement. 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 cash flow 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 to maintain the rigs.

Dev Co: Uncompleted rigs will come under the Dev Co, which will focus on completing the 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$500 million in net funding, mainly for the latter to complete the rigs. This will be provided progressively by Keppel Corporation and repaid over time.

Op Co: The Op Co, comprising the rest of Keppel 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 contractors, including other yards. Keppel O&M’s yard operations will be streamlined, including repurposing or divesting part of its global network of yards. At the same time, the Op Co will invest in capability building as it seizes new opportunities.

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. It will collaborate with other Keppel business units and harness the synergies of the Group to provide diverse solutions for sustainable urbanisation, such as offshore and nearshore infrastructure and floating data centre parks, and also explore how Keppel O&M’s offshore rig technology can be repurposed for other uses.

Mr Loh Chin Hua added, “A key goal of the restructuring is to create a more competitive, asset-light and people-light Keppel O&M, focused on seizing opportunities with higher value capture as a developer and integrator of offshore energy and infrastructure assets. At the same time, the Rig Co and Dev Co will ring-fence Keppel O&M’s non-core rig assets, contain any further capital outflow beyond the initial funding, and work towards resolving this legacy issue. Through these changes, we aim to create a nimble industry leader that is well-positioned for the global energy transition and can be a strong contributor to Keppel’s target ROE of 15% as we progress towards Vision 2030.”

The restructuring will commence with immediate effect and is expected to be executed over the next two to three years. Reflecting its new focus, Keppel O&M will carry out a rebranding exercise and refine its vision and purpose.

The restructuring is expected to significantly enhance the competitiveness and relevance of Keppel O&M in the longer run but is not expected to have any material impact on the net tangible assets per share or earnings per share of the Company for the current financial year.
escveritas
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Re: Keppel positions for global energy transition, announces bold transformation of offshore & marine business

Unread post by escveritas »

KEPPEL Corp, the world's largest offshore rig builder, unveiled a radical reboot to exit the depressed rig business and pivot to clean energy as the sting of the oil crash led its offshore and marine unit to post record losses of S$1.19 billion in 2020.

The "bold" do-over of Keppel Offshore & Marine (Keppel O&M) - the outcome of a much-awaited strategic review - will result in a more lean and "green" entity better able to snag job wins amid a booming energy transition, be it offshore wind or solar farms, gas solutions or hydrogen energy.

"The energy transition is upon us and has accelerated. The headwinds we face in the O&M industry is intense... critical. So, it's important for Keppel O&M to come up with a good, organic plan to work on immediately. We will transform the company into a nimble, asset-light and people-light Operating Company (Op Co)," said Keppel's chief executive Loh Chin Hua during the group's results briefing on Thursday.

The drastic revamp will free up sickly Keppel O&M from the "stranded" rig assets and provide it with a healthy balance sheet. With a robust net order book of S$3.3 billion - over 80 per cent of which is in renewables and gas solutions - the unit, it is hoped, will carry its weight for Keppel to meet its 15 per cent return on equity (ROE) target that is being led by a 10-year roadmap called Vision 2030.

Keppel O&M's headcount of 10,500 will be "significantly reduced" while it also progressively exits low value-adding repairs and other activities with low bottom line contribution, and focus on higher value-adding work.

One analyst didn't seem surprised: "This is not unexpected. Keppel's Vision 2030 is designed to be higher value add and less low-margin metal-bashing".

Under the plan, Keppel O&M's yard operations will be streamlined. Mr Loh elaborated: "We don't need the (yards) footprint as we have today. There is a possibility to repurpose. We can also sell the surplus yards, of course. But a lot of activity we are going into, which are non-oil rigs, may also require production space."

On whether this could lead to potential write-downs, he said it was too early to say.

To facilitate the split from and eventual offloading of the rig business, Keppel O&M will be restructured into three parts. They include a Rig Co and a Development Co (Dev Co) - transient entities, which will respectively hold the completed and uncompleted rigs or "legacy assets" worth some S$2.9 billion. The completed rigs would be put to work or monetised while the uncompleted ones, once finished, will be delivered to customers or transferred to Rig Co to be put to work or sold as the oil market recovers.

The third one is the Op Co, a key entity that will hold the rest of Keppel O&M and serve as an "integrator of offshore energy and infrastructure assets" and is expected to be self-sustaining, financially independent and profitable over time.

"The goal of creating three divisions is to clearly identify the legacy assets and ring fence them. We can't solve all this immediately (but) there is a very good plan to resolve them. Meantime, we also do not want to burden the Op Co, which itself has an important task to transform to make itself more relevant," Mr Loh, who is also Keppel O&M chairman, added.

CGS-CIMB Research analyst Lim Siew Khee said: "Total exit is not easy. This is the best they can do for now".

Indeed, it has been a difficult time for Singapore's rig-building heavyweights after oil prices plunged to historic lows as the Covid-19 pandemic decimated energy demand and the oil cartel turned on the taps last year.

Tough times call for radical revamps.

Last year, Sembcorp Marine, another giant rig builder, was demerged from its parent Sembcorp Industries and recapitalised to survive the onslaught of the oil slump. While the downturn was expected to finally spur a long-anticipated merger between the giants - SembMarine and Keppel O&M - Keppel's latest move could dash hopes of such a union in the near term.

Even so, inorganic options cannot be completely ruled out as Mr Loh added that Keppel would continue to explore such options.

He was quick to add: "But there is no certainty any transaction will materialise. We will execute this organic plan immediately. But along the way, when there are inorganic options that will strengthen Keppel O&M and provide better value proposition to stakeholders, we will certainly consider that."

Keppel's second-half report card that was released on Thursday indicated that, going forward, it has likely put the worst year behind it.

For H2 ended December 2020, the conglomerate's net profit fell sharply by 91 per cent to S$31.3 million from S$350.7 million a year ago owing to lower contributions across all key segments from urban development, connectivity and asset management and mainly led by losses in the energy and environment business.

Sequentially however, this marked a recovery from the first half's loss of S$537 million. Revenue fell 21 per cent S$3.4 billion from a year ago. Accordingly, earnings per share for the six months fell to 1.7 Singapore cents from 19.3 Singapore cents.

For the full year, Keppel recorded its biggest loss since the Asian Financial crisis of S$505.9 million, a reversal from a net profit of S$707 million a year ago. Hefty impairments of S$952 million mainly in the O&M business was the chief culprit for the weak showing. Most of the impairments was booked in the second quarter, a disastrous period for the sector globally.

Excluding impairments, full year net profit would have come in at S$446 million, 37 per cent lower than a year ago. Revenue in 2020 fell 13 per cent to S$6.6 billion.

A final cash dividend per share of seven Singapore cents was declared for FY20, down from 12 Singapore cents. Including the interim dividend of three Singapore cents, total distribution for FY20 will be 10 Singapore cents per share versus 20 Singapore cents in FY19. If approved at the annual general meeting scheduled to be held on April 23, 2021, the proposed final dividend will be paid on May 11, 2021.

Keppel's stock price fell 12 Singapore cents or 2.15 per cent to close at S$5.46 on Thursday.
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