Keppel Corp: AOD exercises jackup option for US$184m (DMG)

(BUY, S$11.18, TP S$13.80)

On track for record-breaking annual order intake; maintain BUY. Asia Offshore Drilling (AOD), a unit majority owned by Mermaid Maritime and Seadrill, has exercised an option to build a jackup rig, and is the third unit ordered with Keppel. The US$184m (S$226m) fixed priced option has similar payment terms with its earlier newbuild contracts; 20% down payment and 80% upon delivery. AOD has one more fixed priced option expiring in Sep 2011 and we believe it will be taken up. AOD’s third rig from Keppel is scheduled to be delivered in 3Q2013. Keppel’s YTD order win has reached S$7.4b, and is on track to beat its highest annual order intake achieved in 2007 (S$7.4b). We estimate that Keppel has an outstanding orderbook of around S$10.5b. Maintain BUY and SOTP-derived TP of S$13.80. Keppel is now trading at 13.8x FY12F P/E vs. peak upcycle forward P/E of ~22x in 2007.

Seadrill takes strategic stake in AOD; we think fourth unit will be taken up. Seadrill has acquired a strategic stake in Asia Offshore Drilling to become equal equity holders with Mermaid. Following a recent private placement exercise, Seadrill and Mermaid will each own 33.75% of AOD. Seadrill will also manage the construction supervision and commercial operation of the rigs under construction. Given that the option is in the money and now with Seadrill onboard, we believe the option for the fourth unit will be taken up before it expires in Sep 2011.

Jackup newbuild cycle still got legs. We estimate that Keppel has won a total of 25 jackup rigs since the start of the cycle in Oct 2011. While the number of jackup on order is unprecedented, the cycle is not over as we estimate that there is a shortfall of around 150 rigs in the next decade due to: (1) retirement of older rigs which are operating beyond its design life and; (2) challenges to operate older rigs in challenging drilling conditions such as high temperature drilling and high pressure drilling. We expect S$10b orders from Keppel in FY11F - newbuild orders placed now are expected to be delivered from end 2013 onwards.