Keppel ‘hopeful’ that legacy rigs can be monetised soon as offshore rig market improves

ASSET Co – the entity majority-owned by external investors after the legal completion of the proposed combination of Keppel Offshore and Marine (Keppel O&M) and Sembcorp Marine – is actively engaging clients on potential contracts for its legacy rigs, Keppel Corporation said in an exchange filing on Saturday (Apr 15).

“Amid the improving offshore rig market, we are hopeful that the monetisation of the legacy rigs can take place sooner, leading to an earlier repayment of the vendor notes issued by Asset Co to Keppel,” Keppel said in its response to shareholder questions raised ahead of its annual general meeting scheduled for Apr 21.

The company said it received S$4.25 billion in vendor notes, S$120 million in perpetual securities and a 10 per cent equity stake in Asset Co with a value of about S$499,000, as consideration for the transfer of certain Keppel O&M assets including the legacy rigs and associated receivables to Asset Co.

The perpetual securities bear interest at a fixed rate of 10 per cent per annum and have no fixed redemption date, Keppel added. Asset Co has a right to redeem the perpetual securities after at least five years from their date of issue.

The vendor notes come with a coupon rate of 4 per cent that translates into approximately S$170 million of interest income per annum, said the company. Keppel added that it will also benefit from a redemption premium equal to 5 per cent of the oustanding principal amount if and when the vendor notes are redeemed.

Including a partial write-back of S$293 million from legacy rig impairments made in 2020, the value of Keppel’s investment in Asset Co is S$4.36 billion, Keppel told The Business Times in response to queries.

The overall value of Keppel’s investment in Asset Co amounts to S$2.50 per Keppel share. This is based on the company’s issued and paid-up share capital of 1.75 billion shares.

Asked why Keppel decided to exit the O&M business given the improving market conditions, the company said earnings from its O&M business had been “very volatile” in recent years, ranging from a net profit of S$157 million in 2019 to a net loss of S$768 million in 2020. On average, the O&M business sustained an annual net loss of S$178 million from financial years 2018 to 2022. (see amendment note)

Through the combination of Keppel O&M and Sembcorp Marine, Keppel recognised a disposal gain of S$3.3 billion, the company said. It is expecting to unlock close to S$9.4 billion of value from the O&M transactions, together with the vendor notes and sale of legacy rigs.

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For the whole of 2022, Keppel delivered a total shareholder return of 49.3 per cent, compared with the Straits Times Index’s (STI) 8.4 per cent, the company added. This brings Keppel’s total shareholder return to 77.7 per cent over a 15-month period from January 2022 to end-March 2023, compared with STI’s 9.2 per cent.

Responding to questions on its key business following the divestment of Keppel O&M, the company said it is in the midst of transforming to be a global asset manager and operator, based on its strengths in the areas of energy and environment, as well as urban development and connectivity.

It added that it will continue to expand in areas such as renewables, clean energy, decarbonisation solutions, sustainable urban renewal as well as connectivity, by leveraging its asset-light model.

Strong demand has continued for these assets, said Keppel, despite the volatile macro environment. The company said it believes it is in the “right space and at the right time” to provide these solutions with the growing global focus on sustainable development, climate change and digitalisation.

Even with the divestment of Keppel O&M, Keppel said, it retains strong domain knowledge in those areas and is making progress on its floating data centre module.

At the same time, Keppel said, it will remain cautious and disciplined in evaluating deals, noting that higher interest rates are a challenge that all companies face.

It added that it will continue to strengthen its business resilience amid rising interest rates. As at end-March, about 69 per cent of the group’s borrowings were on fixed rates, with an average interest cost of 3.39 per cent and weighted tenor of about three years.

Keppel shares closed at S$5.90 on Friday, up 0.51 per cent or S$0.03 from the day before.

Amendment note: An earlier version of this story incorrectly stated that Keppel’s net profit ranged from S$157 million in 2019 to S$768 in million in 2020. In 2020, the company incurred a net loss of S$768 million.