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Keppel set to land US$425m rig-building deal


THE offshore and marine arm of Keppel Corporation has won a letter of intent (LOI) for potentially the first rig-building project to be awarded during this protracted offshore and marine (O&M) downturn.

Keppel O&M's subsidiary Keppel Fels has signed an LOI with Awilco Drilling Plc for the construction of a harsh-environment semi-submersible rig and an option to build up to three more rigs, Keppel Corp said after Tuesday's trading close.

Keppel did not disclose details and the terms of the agreement, which have yet to be finalised.

But in a presentation for equity raising to fund this rig-building project, Awilco said that the deal with Keppel Fels is valued at an all-in cost of US$455 million, including US$30 million to ready the rig for drilling operations. Delivery is targeted for 2021 but an option is granted to Awilco to delay this further.

The LOI award is generally seen as a breath of fresh air, signifying the end of a dry spell for rig-building orders. Still, concerns have surfaced over the rig-building margin.

UOB Kay Hian said that at a yard price of US$425 million, the margin for Keppel Fels would be low. IHS Markit's APAC lead for yards and fabrication Ang Dingli also pointed out that one risk factor the yard needs to mitigate is unfamiliarity with the specified Moss Maritime design for the Awilco rig. Keppel had not built semi-submersibles of Moss design before, he noted.

Concurring, industry sources said the US$425 million construction price is tens of millions lower compared to quotes for such a rig before the market crashed in 2014. But in the current market doldrums, it is inevitable that yards have to forgo margins to win contracts, one veteran said.

Mr Ang noted that Awilco has elected to build new rigs for operations off North-west Europe, which is one of the few remaining active mid-water floating rig markets. This sparks hope that the offshore drilling contractor may exercise options for further units, if it manages to find work for its first newbuild. Awilco is seeking to raise US$65 million of gross proceeds through a private equity placement to fund the rig construction.

UOB Kay Hian estimated that this project, when finalised, will lift Keppel Corp's order book to S$4.4 billion, up from S$3.9 billion as at end-2017.

Keppel Corp closed at S$8.02 on Wednesday, down eight cents.