A special design that costs more. The three jack-ups were the first KFELS N Class jack-ups ordered by a customer. Their design is the brainchild of Keppel’s R&D arm, Offshore Technology Development, following Keppel’s extensive experience in constructing rigs for the North Sea region since 1985. The KFELS N Class design supposedly provides the flexibility of having a jack-up unit that can undertake drilling and production activities concurrently. This accounts for its higher price of about US$400m compared with US$200m for a standard 350ft jack-up in 2007.

Rig orders placed in 2006-07. One of the three jack-ups was ordered by Skeie in late-06 with the other two in early-07. The value of the shipyard contracts totalled US$1.16b (about S$1.78b). Assuming a construction period of 36 months and based on their respective delivery dates, we estimate the three jack-ups are possibly 50-70% completed. At this juncture, we have no details of the payments already collected by Keppel FELS. Given the rigs’ estimated completion status, it is possible half of their shipyard contract values have been collected. We need to confirm this with Keppel’s management.

We are maintaining our earnings forecasts pending more details from management. The outstanding shipyard contract values that are yet to be recognised in the Profit & Loss Account possibly amount to 10% of Keppel’s orderbook of S$9.5b as of end-March. Unlike SembCorp Marine’s generic Friede & Goldman ExD semi-submersible rigs for the Larsen group of companies (PetroMena, PetroProd and Larsen Oil & Gas) which also face payment default risks, we are unable the ascertain the current market value of the KFELS N Class jack-up which is not a standard jack-up. A standard 350ft jack-up newbuild has a current market value of US$165m, according to ODS-Petrodata. This is 20% below its peak value of US$210m in Dec 07.

Don’t bank on a special dividend from SPC sale proceeds. Keppel may need to fund the remaining construction cost (estimated at S$1b) of the jack- ups before they can find new buyers. Including Keppel’s commitment of S$373m in Keppel Land’s 9-for-10 rights issue at S$1.09/share, its cash requirements would utilise most of the S$1.47b proceeds from the sale of Singapore Petroleum Company (SPC). Investors who hope for a special dividend payout could end up in disappointment.

Maintain SELL. Our fair price of S$5.90 has factored in the proceeds of the SPC sale and sustainable O&M contract wins of S$3b p.a. in the longer term, which translates into an annual O&M net profit base of S$250m. We value Keppel’s shipyard business at a PE of 15.0x (i.e. pre-offshore oil & gas boom valuation) of this net profit base.