Maintain BUY
Previous Rating: BUY
Current Price: S$11.26
Fair Value: S$13.00
Jack-up rig option exercised. Keppel Corporation (Keppel) announced on Sunday that one of its O&M customers, Asia Offshore Drilling (AOD), has exercised its first of two options to build a KFELS B Class jackup rig worth US$184m (total all-in turnkey price). Recall that AOD, which is established by SGX-listed Mermaid Maritime, had placed orders for two rigs and options for two more in Dec last year. Like the earlier two rigs, down payment for this latest unit is 20% of the contract price with the remaining 80% to be paid upon delivery, which is expected to be by 3Q13.
AOD now has Seadrill on board. Last week, AOD also announced the completion of a private placement which will result in Mermaid and Seadrill each having a 33.75% shareholding ownership in AOD. In Seadrill's announcement, it was mentioned that proceeds from the private placement will be used to exercise the first option. AOD has also applied for listing on Oslo Axess, and a successful listing should increase the probability of the second option being exercised. In addition, Seadrill has also agreed to be responsible for the construction, supervision, project management and commercial management of AOD's jack-up rigs. As such, investors' confidence should increase with a seasoned company behind the reins. The second rig option is exercisable by 30 Sep 2011.
Still optimistic on the jack-up segment. According to Upstream, Rowan is considering ordering a GustoMSC CJ70 design jack-up rig, though an order for a fourth KFELS N Class unit is also a possibility1. Seadrill's CEO also said that he sees potential in adding a third CJ70 unit to his fleet. We note that both companies, like other major players, have been looking to retire older rigs, especially since older units in general have been facing difficulties in qualifying for drilling tenders. Just the end of last month, Seadrill disposed a 26-year old jack-up for US$73m, reducing the average age of its jack-up fleet to 2.6 years.
On track for record year. Keppel's O&M arm has secured S$7.4b worth of new orders YTD, accounting for about 87% of our full year estimate. The group's peak year so far in terms of new order wins was in 2007, when the group clinched also S$7.4b of work. Meanwhile, Keppel still has options estimated to be about S$2.9b yet to be exercised by customers. We maintain our BUY rating and S$13.00 fair value estimate on Keppel.
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