Keppel taking back control over 13 rigs in hot pursuit of monetization during offshore drilling upcycle

In light of the improving conditions in the offshore rig market, Singapore-headquartered asset manager and operator Keppel has set the wheels in motion to seize control and return to its fold 13 legacy rigs currently held by Rigco Holding (Asset Co). The Asian player claims to have no intention of reentering the offshore drilling market and presents the move to retake the baton for these rigs as part of its plan to speed up their monetization.

All 13 rigs and their bareboat charter agreements formed part of Keppel Offshore & Marine’s legacy rig assets, which were planned to be transferred to Asset Co, majority-owned by external investors with Keppel holding a minor stake, upon completion of the business combination between Keppel O&M and Sembcorp Marine. Once the proposed merger was out of the way, the restructured Keppel O&M became a wholly-owned subsidiary of Sembcorp Marine, later renamed Seatrium.

Keppel, which currently holds a 10% equity stake in Asset Co, S$139 million (about $103.72 million) in perpetual securities and approximately S$4.3 billion (almost $3.21 billion) in vendor notes issued by the latter, decided to secure direct control over the 13 legacy rigs and cash of S$843 million (around $629.31 million) on the back of improving fundamentals in the offshore drilling market following a selective capital reduction (SCR) exercise to be completed by Asset Co.

Loh Chin Hua, CEO of Keppel, commented: “Asset Co has one of the most advanced rig fleets available in the market today, where about half of these rigs are contracted and generating stable cashflows. Amidst the improving conditions in the offshore rig market, with some segments benefitting from utilisation rates of about 90% and improving day rates, securing control over the management and monetisation of our legacy rigs will enable us to reduce our risks as a substantial creditor to Asset Co, and better realise the potential of its assets.”

Once the SCR exercise is done, which is anticipated to be accomplished by the end of 2024, the shares in the capital of Asset Co not held by Keppel will be canceled, enabling the latter to become a wholly-owned subsidiary of Keppel, which will be housed within a newly created private fund the Singapore player will manage.

According to the company, this will allow it to manage when and how the legacy assets are monetized to ensure the best risk-adjusted returns. The firm claims that the S$843 million of cash in Asset Co as of the end of September 2024 can be utilized to complete the unfinished rigs, however, it adamantly denies any intention of re-entering the offshore and marine business.

“As the largest economic interest holder in Asset Co, Keppel remains focused on the monetisation of the legacy assets. As part of the existing master services agreement, Seatrium Limited will continue to provide construction, maintenance, and other associated services for the legacy rigs for an initial period of 10 years after the combination of Keppel Offshore & Marine Ltd (now known as Seatrium Offshore & Marine Ltd) and Sembcorp Marine Ltd (now known as Seatrium Limited),” explained the company.

Therefore, Keppel plans to establish a new and dedicated private fund, Keppel Offshore Infrastructure Fund, to own and manage the legacy rigs and its 49% stake in Floatel to attract third-party capital from limited partners and co-investors in line with its asset-light business model, which will provide the firm with greater strategic flexibility to respond to market opportunities via directly managing the rig assets, while potentially earning asset management fees as a general partner of the fund.

The established fund would also have the option of selling the rigs or exiting through a securitization route in the future. Keppel claims that the global drilling fleet is aging rapidly, compounded by years of underinvestment in new supply, with the trend being particularly evident in the jack-up market, where a shortage of premium rigs is projected to come in the coming years.

“A successful selective capital reduction exercise by Asset Co will put us in the driver’s seat to exert better control of the cash in Asset Co, and accelerate rig monetisation which will unlock funds that can be used to reduce debt, reinvest for growth and reward shareholders. The planned establishment of a private fund to manage Asset Co’s rigs will further complement this goal, allowing us to turn these legacy assets into fee-bearing funds under management in line with our asset light model,” highlighted the CEO of Keppel.

The Singapore player believes that the increasing shortage of advanced drilling rigs, high costs, and long lead time associated with constructing new ones will likely create attractive opportunities for undelivered rigs from the previous construction cycle and the remaining idle rigs that can be reactivated.

“This trend presents a prime opportunity for Keppel as an asset manager to unlock the potential of its legacy rigs by offering operators a more cost-effective and quicker means of securing additional rigs for their near-term drilling requirements,” underlined the company.

Keppel has been on the lookout for low-carbon opportunities recently. To this end, the firm inked a conditional offtake term sheet with Woodside to buy liquid hydrogen to power its data centers in Singapore. This remains conditional upon, among others, the negotiation and execution of a fully-termed sale and purchase agreement (SPA) and obtaining all necessary approvals.

The company also joined forces with Chevron, Pan-United Corporation, Surbana Jurong, Air Liquide, Osaka Gas, and Pavilion Energy to explore lower carbon opportunities to support Singapore’s aspiration of achieving net-zero emissions by 2050.