Keppel FELS terminates US$425m contract to build drilling rig

Singapore

GLOBAL offshore group Keppel FELS has terminated a US$425 million contract from Awilco Drilling to build a mid-water drilling rig, the mainboard-listed parent firm Keppel said in a Friday night bourse filing.

Keppel FELS has assessed that the Awilco unit it signed the contract with will not be able to make its second instalment payment due in March 2021. Keppel had announced the contract in March 2019.

This marks the second instance of a contract between Keppel FELS and Awilco being terminated. The first contract, announced in 2018, was also worth US$425 million and involved the construction of a mid-water drilling rig. This contract was axed in June.

In the Friday filing, Keppel FELS said that it issued a notice of termination of the second contract to Awilco and commenced arbitration to enforce its rights against Awilco. Keppel FELS seeks to retain the US$43 million already paid by Awilco to date, along with reimbursement of project costs up to termination.

As of the announcement, Keppel FELS does not expect any reversal of revenue recognised under the second contract, and no further impairment is expected beyond the assumptions in its latest financials for the half-year ended June.

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Separately, Keppel announced on Saturday that another unit, FELS Offshore, has entered a lock-up agreement for a proposed restructuring of offshore vessel player Floatel.

Floatel is 49.92 per cent-owned by FELS Offshore. The lock-up agreement includes an ad hoc group (AHG) of holders of US$400 million worth of Floatel's 9 per cent senior secured first lien (1L) bonds, as well as other consenting 1L bondholders who control over 56 per cent by value of the bonds. The lock-up agreement will commit Floatel, Keppel, the AHG and any acceding 1L bondholders or holders of the US$75 million worth of Floatel's 12.75 per cent second-lien (2L) bonds to attempt a financial and corporate restructuring of Floatel.

The restructuring is expected to involve a new Bermuda-registered company acquiring certain subsidiaries of Floatel that own and operate vessels. Keppel would eventually hold about 49.92 per cent of the new company. Floatel is expected to file for provisional liquidation in Bermuda after the acquisitions by the new company.

In its filing, Keppel said that it has entered the lock-up agreement "to facilitate and support the proposed restructuring", but also noted that there is no certainty that the transaction will proceed as laid out.

It added: "Accordingly, it is premature to speculate on the financial impact of the transaction on the company's investments in Floatel."

But based on an analysis, the entry into the lock-up agreement is not expected to result in any further impairment to Keppel's carrying value of Floatel, being S$165.4 million as at end-June. Shares of Keppel last closed at S$5.26 on Friday.