SembMarine and Keppel's O&M union: when one is better than two

Singapore

IN a year dominated by landmark corporate reboots by Singapore's bigwigs from the telco, energy, media to real estate and transport sectors, the latest idea by giants Keppel Corp and Sembcorp Marine (SembMarine) to create an offshore & marine (O&M) powerhouse through a merger of their O&M businesses may be hard to outshine.

Notwithstanding the scale of the mammoth merger or the ingenuity of its timing (an earlier round of restructuring by both firms have turned their O&M operations ripe for a union), it is a consolidation that the market has patiently waited for - and conjured up - for over two decades. For that reason, the memorandum of understanding between Keppel and SembMarine unveiled yesterday to combine their O&M businesses to capitalise on the booming energy transition could put markets in a tizzy, even if it is least surprising.

Let's face it. Singapore does not need two offshore juggernauts, weather-beaten and loss making as they are from a prolonged oil slump, and not least because the real competition is out there (think, Korea and China). While the sharpest cut came from last year's historic oil crash on the back of pandemic-led lockdowns which hurt energy demand, oil prices have never quite recovered from the 2015 downturn. That's a long time for a business to stay in the doldrums.

A consolidation that could result in a leaner and tougher entity may be just the antidote to deal with a hostile climate bursting with competition, overcapacity and fewer jobs as a result of retreating oil prices.

So far this year, crude prices have risen over 70 per cent from a year ago, but the wider macro setting for the sector remains tough alongside the global energy sector's transitions away from oil. But a sweet spot has emerged from the booming energy transition into clean energy which the merged entity hopes to capitalise on. It may not need to even work that hard given its operational and engineering heft, know how and geographical footprint arising from merger synergies.

Keppel and SembMarine have already made striking pivots to renewable energy. Of SembMarine's net order book of S$1.82 billion as at end-2020, 50 per cent comprises orders for greener solutions. More than 80 per cent of Keppel O&M's S$3.3 billion orderbook as at the same period involved renewables and cleaner fossil fuels such as liquefied natural gas. Both these firms were long known for their traditional business in the offshore drilling rigs business.

This deal could not have come sooner for SembMarine which has been in the red for three straight years. The firm has also been one of the hardest hit by the pandemic in terms of supply chain constraints and shortages of skilled workers which have impacted project execution and completion. The recent curbs, including border controls, have further worsened its manpower predicament.

And so, its proposed S$1.5 billion cash call announced on Thursday, which follows nine months after an earlier S$2.1 billion recapitalisation, to delever and plug temporary working capital gaps is a potential life saver, although shareholders may still begrudge the resultant massive dilution and heavily discounted rights issue price. The rights issue will be backstopped by Temasek Holdings and DBS.

The latest Keppel-SembMarine announcement serves as a nice finisher to an over year-long reform involving these key entities in Temasek's portfolio. It began with a major de-merger unveiled in June last year that saw SembMarine part ways with its former parent company Sembcorp Industries.

For much of this year and last, the refreshed narrative of Keppel and Sembcorp, each guided by their multi-year blueprints to grow big into clean energy and sustainable solutions, have overshadowed SembMarine, which was shunned by investors given its cloudy outlook and dull prospects.

The merger - far from a done deal and for now held together by merely a non-binding MOU - could switch things up for the long-weary O&M entity. This is merely the start of a mammoth exercise that will stretch over many months but the end of the long road may be one to watch most closely.