Sunday, 31 January 2021

Keppel Exiting Rig Business – What it means?

Keppel announced on Thursday that she will exit the right-building business. Keppel Offshore and Marine. (KOM) will be split into three companies. 

1) Operating Co – An asset and people light company focused on design, engineering and procurement; fabrication to be subcontracted to third parties;

2) Rig Co – To charter/manage Keppel Corp’s rigs with the ultimate aim to sell all rigs; to be dissolved thereafter; 

3) Development Co – To complete construction of Keppel Corp’s order book; to be dissolved thereafter. 

This is not unexpected as Keppel has been dragged down by its rig business in recent years following the oil crisis, writing down assets worth hundreds of millions. 

In my previous article, I had cited almost exactly the strategy that Keppel is doing today. 

@QUOTE

“Otherwise, there are also possibility of selling KOM businesses in parts if not wholly, such as disposal of Rig business, Floatel business, FPSO business, Marine business, Renewable business, Proprietary Designs, Repairs business, Defunct KrisEnergy? etc.” 

@UNQUOTE

For more about my previous article: 

Rolf’s Thoughts: How Is Keppel Going to Monetize S$17.5 billions and Revamp It’s O&M Business?


FROM OIL AND GAS TO RENEWABLES 

KOM has net order book of SGD3.3 billion with more than 80 percent of which is in the renewables and gas solutions. Approximately 60 per cent is gas business today. Hence, I believed that KOM will definitely want to increase its share of Offshore Wind and Solar business. The way forward is to be Developer of Renewable Assets, as I also mentioned in my previous earlier article. 

Developer of Renewables 

The developer acts more like a consultant with extensive knowledge of the sectors, as well as familiarity with state regulation, and have high level connections in government, state power/electricity companies and financial institutions. 

Keppel has most of these pre-requisites.  

The developer of renewable assets will assess a land suitable to be developed into Offshore Wind Farm or Solar Farm. Feasibility studies will be conducted. E.g. cost of development; how much electricity it will be able to produce i.e. revenue; how to develop it with major suppliers; assess connectivity etc. 

Then, he/she will find investors to own the Wind or Solar farms. Capital is normally in billions USD. Typically, the state and major financial institutions will acquire become the major stakeholder. The developer themselves can also own a major stake in these “farms” or just a very small or no stake, acting purely as a consultant or project management company, doing the subcontracting to major Wind Turbines or Solar companies. 

Hence, the developer can be completely asset light. 


NON-COMPETITION WITH SEMBCORP MARINE (SCM) FACILITATES MERGER

The disposal of rig business will mean that Keppel is entering into a non-competitive nature with SCM. KOM and SCM are two world’s largest oil rig builders, combining these two giants in the oil and gas sector will mean almost complete monopoly in this segment of business. 

KOM exiting Rig business is strategically clever. This  move can facilitate the Merger of Keppel and SCM without having the anti-competition watch dogs blocking the deal. 

Read:

Will Keppel Offshore & Marine and Sembcorp Marine Merge? 

To Merge Sembcorp Marine and Keppel O&M is NOT up to Temasek and Shareholders alone? Anti-competition Authorities may REJECT!

If KOM and SCM is merging, and with Keppel going to dispose all the yards, SCM main construction yard will be the Mega Tuas yard. SCM can then keep some smaller yards for repairs and conversion. SCM currently has Rig and FPSO EPC capabilities. Keppel has FPSO conversion capabilities. Both have shipbuilding and repairs capabilities that can easily be further merged to reduce cost. 


COST CUTTING 

Investors and shareholders always welcome cost cutting to maximise profits. Yet, this is cruel to KOM’s more than 10,000 employees. Many heads will roll eventually. Yards will also be all sold eventually unlocking assets. 

KOM only wanted to retain Operating Co – that is people with expertise and subcontracting to third parties. Most who work in the yards, with production expertise will have to bid farewell in a matter of time, leaving behind few with more knowledge who can help to manage the subcontracting process. 

However, total exit within a short time is not possible. It will have to be done in transitional manner over the next few years. Rig Co still need to sell or charter those rigs, that will take a long time. Development Co will also still need time to complete existing construction projects. 

The morale of employees in KOM will be very low. What motivations will the employees in Rig and Development Co have? Perhaps monetary incentives or promise to relocate to other Keppel’s companies or Op Co. But this will only be extended to a smaller percentage of the employees. 

Project and engineering people will start to look for jobs. The departure of good project and engineering people will mean existing construction projects adversely affected, with project budget ballooning. 


CONCLUSION

Following Keppel’s announcement of 2H2020 losses and her new strategy, share price tumbles more than 10 per cent, closing at SGD5.01. Price to book is 0.85 based on the most recent quarterly result. 

The important question: Will I buy into Keppel shares? 

The answer is No, for now. 

Transition of a business, especially downsizing will always cause great short term adverse effect to the business. Although it looks promising in the longer term, the business will take several years before it turns good again. And we have to wait and see if it really turns good. Better to put the money into many other companies that are doing better than in Keppel now. Maybe small allocation or for trading purposes is ok. 


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