Published January 30, 2009

Keppel unit's US$780m deal to build four rigs at stake

US client suspending work on one rig, negotiating payment terms on all four

By VINCENT WEE

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KEPPEL Corp's US unit Keppel AmFels' US$780 million deal to build four jackup rigs for US contract drilling services provider Rowan Companies may be at stake as the company announced in a filing with the US Securities and Exchange Commission that it is suspending construction work on one rig and negotiating payment terms on all four.

New conditions: Keppel AmFel's Texas yard. The firm said it will only accede to requests that do not adversely impact its financial position

Reuters reported on Monday that Rowan will eliminate its dividend, cancel the building of a jackup rig and suspend construction of another one that its own manufacturing unit is building, as well as the last of four that is being built by Keppel AmFels. This is to counter a fall in oil services demand. It also warned of contract cancellations, blaming tight credit conditions.

The company said customers have been asking to delay or terminate their obligations to purchase equipment under construction, notwithstanding firm contractual commitments.

'Keppel AmFels has no obligation to revise its contractual terms on the orders from Rowan and will only accede to requests that do not adversely impact its financial position,' said a Keppel spokesman yesterday.

The contract, signed in November 2007, valued each of the rigs at US$195 million and includes the cost of equipment which will be provided by the owner.

Offshore and marine industry website Energy Current reported that of the four Super 116E class jackups being built by Keppel AmFels, construction of the first three of the series is underway with deliveries expected in 2010.

The fate of the fourth rig, however, depends on market conditions and negotiations with the builder, Rowan's director of investor relations Suzanne McLeod was quoted as saying. Furthermore the website said that none of the Rowan rigs on order or under construction has been contracted so far.

Rowan is a new customer for Keppel AmFels and may have made the decision to use Keppel AmFels, in addition to building at its own yard, to quickly ramp up capacity in anticipation of the oil boom. Deliveries of the four jackups were scheduled to be made progressively from the second quarter of 2010 until 2011.

'The construction contracts with Keppel AmFels afforded us the opportunity to accelerate the expansion of our offshore drilling business by partnering with a first-class organisation and shipyard,' said Rowan chairman and chief executive Danny McNease at the time. It appears the company is trying its luck to buy itself more time.

'We think Keppel may want to carefully consider whether it should allow further adjustments to contract terms, as the risk is that these may set a precedent for other customers to follow,' said a recent Deutsche Bank report.

Keppel Fels earlier this month agreed to revised payment terms on a jackup building contract with Seadrill.

Keppel shares closed eight cents lower at $4.10 yesterday.