CORPORATE RESTRUCTURING

Keppel says goodbye to rig business, pivots to clean energy

Drastic revamp of Keppel O&M will see leaner and "green" entity; H2 gain dives to S$31m as O&M unit posts record full-year loss of S$1.19b

Anita Gabriel
Published Fri, Jan 29, 2021 · 05:50 AM

Singapore

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.

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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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