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Speculation rife over possible Singapore yard merger

If a merger is on the cards, as the chatter on the shipping grapevine suggests, Temasek’s $4.1bn equity offer for Keppel Corp will just be one small step towards a tie-up between Keppel O&M and SembMarine

Investors have grabbed shares in three listed counters affilated with Keppel O&M and SembMarine, but given Temasek’s deal does not provide clear and thorough detail about the rumoured merger, the rally is unlikely to persist until the pertinent questions are answered

TEMASEK Holdings’ move to inject equity into Keppel Corp is seen as validating an unspoken understanding in the key trading and financial hub of Singapore.

The sovereign wealth fund may have a mandate to chase after returns on investments to bolster Singapore’s coffers but it is apparently also equally expected to keep key components of core sectors of the local economy going.

It holds major equity stakes in Keppel Corp and Sembcorp Industries — the listed parent groups of Keppel Offshore & Marine and Sembcorp Marine, which have long anchored Singapore’s shipbuilding and ship repair industry.

More than 130,000 vessels call at Singapore’s busy port annually and many go to the biggest shipyards operated by Keppel O&M or SembMarine for quick fixes before setting sail.

The leading yard operators have also lifted Singapore’s standing in the offshore sector — building at least 70% of the world’s operating jack-up rigs, as policy-makers liked to quip at the height of the last offshore upswing.

It was precisely this rig-building frenzy along with a healthy pipeline of contracts from large upstream oil and gas projects that bolstered Keppel O&M and SembMarine’s bottom lines and share prices during the good old days of $100 oil prices.

As with yard operators in South Korea and China, Keppel O&M and SembMarine took big hits to their annual turnover and earnings when offshore contracting and rig-building activities drastically slowed after oil prices collapsed in 2014.

Thousands of workers once engaged to deliver a steady stream of high-value offshore projects were let go to slash overheads.

Revival

In recent months, though, the yards have started rehiring as contracting volume — both from offshore and the larger maritime sector — seemingly staged a rebound.

Temasek chose to unveil its multi-billion dollar equity injection into Keppel Corp at this timely juncture, when oil prices appeared to stablise above $50, a level deemed as supporting upstream oil and gas projects.

Its S$4.1bn ($3bn) offer, equating to a per share price of S$7.35m lifted Keppel Corp, SembMarine and its separately listed parent group’s share prices.

Equity analysts broadly consider this move as reigniting a proposed merger between Keppel O&M and SembMarine first mooted in the early noughties.

That proposal fired up a months-long public debate, with proponents challenging the merit of hosting two large competing yard groups in a country smaller than New York City.

The idea of the merger also first surfaced at a time when Keppel O&M and SembMarine were battling a sectoral slowdown.

It was eventually aborted after the yard operators managed to successfully re-invent themselves as preferred builders for rigs and trusted contractors for conversions of floating production, storage and offloading vessels.

Fast-forward to almost two decades later, similar dynamics have been at play — offshore contracting activity accounting for the bulk of orders the two yard operators received up until the mid-2010s looks set to stage a comeback.

Rystad Energy’s recent data points to increasing jack-up rig fleet utilisation — a barometer for the health of the larger offshore industry.

Despite this, rig-building orders will not return to levels seen during the glorious $100 oil price era any time soon.

Dozens of jack-ups ordered on a speculative basis with no charters on hand are still waiting to join the working fleet. This does not bode well for a recovery in rig-building activity.

The FPSO segment, which is not so weighed down by overcapacity, is widely counted upon to continue to offer contractors and yard operators some reprieve.

However, Singapore is no longer considered the preferred destination for FPSO conversion, which is just one area in which the Chinese yards have made significant inroads in the intervening years.

Remodelled

Keppel O&M and SembMarine have once again sought to re-invent themselves.

SembMarine has aggressively bid against rivals in South Korea to land a large share of far fewer high-value turnkey contracts tendered out internationally in recent years. That however, required the yard operator to invest in capacity-building even in the depths of the downturn.

Keppel O&M largely stayed away from high-risk, turnkey contracts, opting instead to partner Golar LNG in pitching converted floating liquefied natural gas vessels for the development of remote or stranded fields.

Neither of these approaches has so far helped to sustainably boost bottom lines.

SembMarine returned to the black during the three months to March but slipped into the red yet again in the second quarter.

Keppel O&M only eked out net earnings of S$10m in the first half of this year.

The revived speculation of a merger between the two is thus far not exactly groundless.

Temasek raising its shareholding and seizing control over Keppel O&M is seen as paving the way for this merger.

Financial detail

But investors and industry players will want details, which may not be forthcoming until two evolving material matters come to a full conclusion.

Keppel O&M and SembMarine were both embroiled in a multi-year anti-corruption probe dubbed Lava Jato, in Brazil’s tainted oil and gas sector.

Keppel O&M chose to pay $422m in fines to authorities in Brazil, Singapore and the US in seeking to stem the damage the probe might inflict on itself and its larger parent group.

This event, though, put SembMarine under the spotlight and concerns about this issue resurfaced during July of this year after the Brazilian police exercised a search warrant on the yard group’s subsidiary in the Latin American country.

Pointing to a relatively slower build-up in the investigation conducted against SembMarine, one industry veteran questioned whether Lava Jato still tops the agenda of the powers-that-be in Brazil.

This suggestion stemmed from speculation that the crackdown was motivated partly by opposition to the former Brazilian president Dilma Rousseff who was impeached during the process.

That said, a generally shared consensus is that until SembMarine’s role and exposure are clearly defined — which may not be any time soon — progress on the merger would be slow.

The two yard operators have nonetheless, managed to clear the air somewhat on a second lingering concern holding back investor interest — the overhang from undelivered rig-building orders.

Earlier this month, they disclosed settlements with Sete Brasil that will see the resale of four out of 13 rigs originally contracted by the financially distressed owner to Magni Partners.

Sete Brasil had signed rig-building contracts totalling more than $10bn, commissioning SembMarine for the construction of seven drillships and Keppel O&M, six semi-submersible rigs.

The yard operators will now have to take the remaining units on their balance sheets.

Post-Sete Brasil settlements, SembMarine will be relatively less encumbered by a backlog of ill-fated rig-building orders.

Keppel O&M, however, still needs to either deliver or find new owners for between six and nine jack-up rigs sitting in its yard five years now into the offshore downturn.

How the yard operators may press on to resolve the rig-building overhang will weigh in on the valuation of their shares and the final terms of any merger deal.

Investors have pinned high hopes on the merger coming through following Temasek’s announced equity injection for Keppel Corp, evident in the advances the three reflected counters — Keppel Corp, SembMarine and Sembcorp Industries — have made on the Singapore Exchange, three days after the announcement.

It will be interesting to see how long this rally may last considering the multiple unknowns holding back the marriage, if any, between Singapore’s leading yard operators.

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