Keppel to exit offshore rig building to position for energy transition

A Keppel shipyard
A Keppel shipyard; Source: Keppel

Singapore’s conglomerate Keppel Corporation has revealed that its struggling Keppel Offshore & Marine unit will exit the offshore rig building business as the company positions for the global energy transition.

Keppel started a review of its offshore & marine business as part of its overall strategy and roadmap amid the sector’s challenging environment back in late September 2020.

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In an update on Thursday, the company announced that, amidst the global energy transition and major disruptions facing the oil industry, the company will carry out a comprehensive transformation of its wholly-owned subsidiary, Keppel Offshore & Marine, to better align it to Keppel’s Vision 2030.

The review has the goal of creating a slimmer, and more competitive Keppel O&M that is well-placed to support the energy transition, even as the company continues to explore inorganic options.

As a result, Keppel O&M will exit the offshore rig building business, after completing the existing rigs under construction.

Keppel O&M will not undertake any new project requiring large upfront capex or without milestone payments.

It will also progressively exit low value-adding repairs and other activities with low bottom-line contribution, and focus on higher value-adding work.

Loh Chin Hua, CEO of Keppel Corporation and Chairman of Keppel O&M said, “The share of renewables and new energy solutions in the global energy mix has been growing rapidly, driven by environmental concerns as well as technological advancements and the declining cost of renewables.

“Natural gas, as a transitional fuel, is also projected to overtake oil as the world’s largest energy source in the years to come. To seize opportunities in this fast-changing environment, we are making bold and decisive moves to transform Keppel O&M to ensure that it remains relevant and competitive and fully aligned to Keppel’s Vision 2030”.

“We are also exploring inorganic options for the O&M business, but there is no assurance that any transaction will materialise”.

Keppel O&M restructuring

As part of the transformation, Keppel O&M’s business will be restructured into three parts: a Rig Co and a Development Co (Dev Co), which will be transient entities created to hold its approximately S$2.9 billion worth of completed and uncompleted rig assets.

The third part will be an Operating Co (Op Co), comprising the rest of Keppel O&M, which will be transformed into an asset-light and people-light developer and integrator of offshore energy and infrastructure assets.

Rig Co

Keppel O&M’s completed rigs will be placed under the Rig Co, which will put the completed rigs to work or sell them if there are suitable opportunities.

A dedicated team will be appointed to support its chartering and marketing activities. This will only be a transitional arrangement. As the oil market recovers, utilisation and day rates improve, and the rigs generate steady cash flow, the Rig Co will sell the rigs or collaborate with Keppel Capital to seek funding from external investors.

A cash flow generating Rig Co can be monetised or spun off in the future. The Rig Co is expected to be self-sustaining and would only require limited initial funding to maintain the rigs.

Dev Co

Uncompleted rigs will come under the Dev Co, which will focus on completing the rigs, while prudently managing cashflow. Priority will be given to completing rigs that have firm contracts with customers.

The Dev Co will be wound up, once the rigs have been completed and delivered to customers, or transferred to the Rig Co, where they will be put to work or sold.

The Dev Co would require some initial funding from Keppel, after which it is expected to operate independently.

The Rig Co and Dev Co are collectively expected to require about S$500 million in net funding, mainly for the latter to complete the rigs. This will be provided progressively by Keppel Corporation and repaid over time.

Op Co

The Op Co, comprising the rest of Keppel O&M, will progressively transit to a developer and integrator role, focusing on design, engineering and procurement.

It will be people-light and asset-light, with fabrication work subcontracted to its eco-system of contractors, including other yards.

Keppel O&M’s yard operations will be streamlined, including repurposing or divesting part of its global network of yards. At the same time, the Op Co will invest in capability building as it seizes new opportunities.

The Op Co will exit the offshore rig building business, and progressively exit low value-adding repairs and other activities with low bottom-line contribution. It will seek opportunities in floating infrastructure and infrastructure-like projects that can deliver predictable streams of cashflow, including renewables projects such as offshore wind farms and solar farms, gas solutions, production assets and new energy solutions such as hydrogen and tidal energy.

It will collaborate with other business units and harness the synergies of the Group to provide diverse solutions for sustainable urbanisation, such as offshore and nearshore infrastructure and floating data centre parks, and also explore how Keppel O&M’s offshore rig technology can be repurposed for other uses.

The restructuring will start with immediate effect and is expected to be executed over the next two to three years.

Reflecting its new focus, Keppel O&M will carry out a rebranding exercise and refine its vision and purpose.