On a late afternoon on Sept 29, Keppel Corp CEO Loh Chin Hua sat down to give a virtual briefing on the company’s future direction over the next decade. It was well attended by more than 20 journalists and analysts and lasted for more than an hour as Loh patiently took on a barrage of questions. By the end, one thing was clear — it would no longer be business as usual at Keppel.

Indeed, the company’s reaffirmation of Vision 2030 has done more than to signal the end of its reliance on the offshore and marine (O&M) business. The conglomerate has envisaged itself to become an integrated company that would provide solutions for “sustainable urbanisation”. In other words, Keppel would transform into a property developer that will draw on synergistic benefits from its other businesses.

“We are not just a property developer in the traditional sense where we develop vertically. We have infrastructure capabilities. We have environmental solutions. We can look at renewable energy. We can look at connectivity like 5G [and] data centres. So, we can bring more than just a traditional property developer [can offer]”, Loh said.

To achieve that, Keppel intends to monetise about $17.5 billion worth of assets over time. Of this, $3 billion to $5 billion will be unlocked over the next three years. The proceeds from such an endeavour will be redeployed to seize new opportunities and improve returns.

As part of Vision 2030, Keppel also said it cannot maintain the status quo at Keppel’s rig-building unit Keppel Offshore & Marine (Keppel O&M). The latter has been a drag on the company’s performance since the mid-2014 crash in crude oil prices. Keppel O&M has also been tainted by a bribery scandal involving its projects in Brazil.

To that end, Loh said Keppel will commence a strategic review of its O&M business amid the sector’s challenging environment. The company will explore organic options, such as reviewing the strategy and business model of Keppel O&M, assessing its current capacity and global network of yards and restructuring to seek opportunities as a developer of renewable energy assets. It will also explore inorganic options that would range from strategic mergers to disposal.

Loh did not say if Keppel would undertake a complete divestment of Keppel O&M. He also did not confirm whether a strategic review of Keppel O&M would involve Temasek Holdings, which owns a 21.4% stake in Keppel. “…this is still early days where we have made a decision to conduct a strategic review and all we can say is that, you know, [all] options will be considered”, he said.

However, Loh mentioned that Keppel would not take its sweet time to complete the strategic review of its O&M business. “There are very intense headwinds that we are facing currently”, he said. “[The strategic review of Keppel O&M] should not take years; it should take months”.

Little reason to keep Keppel O&M

A complete divestment of Keppel O&M would be the best way forward for Keppel. It would allow the company to focus on its new strategic direction without getting bogged down by excess baggage.

And after all, there is little reason to keep Keppel O&M. The oil industry — and by extension the O&M industry — is unlikely to recover from a prolonged downturn any time soon. Demand for oil will continue to be weak as economic activity has yet to return to pre-Covid-19 levels. Jet fuel, which is one of the biggest components of oil consumption, is also not expected to increase in demand as air travel remains largely muted.

On the supply side, oil majors lack incentive to make new investment decisions as crude oil prices remain low. That will reduce new exploration and production projects, and in turn, dampen demand for rig building and offshore platform fabrication.

Although there may be pockets of opportunities in the O&M industry, Loh himself said that the opportunities are less abundant than they were before. On the contrary, more opportunities now lie in renewable energy and gas, which is touted as a transition fuel to clean energy, he pointed out. Such opportunities may not necessarily require Keppel O&M’s yards, and thus, render them as stranded assets.

Given that, Keppel O&M may very well record another round of impairments and cause Keppel to suffer another huge loss. The latter had previously swung into a net loss of $537 million in 1HFY2020 ended June 30, owing to a huge impairment of $930 million. The impairment was mainly related to Keppel O&M’s stranded assets, receivables, stocks and share of impairment provisions from Floatel International, a subsidiary of Keppel O&M.

Worst of all, Keppel O&M’s bribery scandal in Brazil — which appears not fully resolved — may return to haunt the company. On June 11, Keppel announced that an administrative enforcement procedure (AEP) against Keppel O&M and its Brazilian subsidiaries was initiated by the Office of the Comptroller General of Brazil (CGU). This is in relation to the alleged irregularities under the Brazilian Anti-Corruption Statute.

Although the AEP has been suspended, Keppel O&M is not out of the woods just yet. According to a filing made on Aug 20, the suspension does not mean rescission of the AEP. Keppel said that it will make further announcements as and when there are material developments on the matter.

Keppel O&M is also in discussion on the remainder amount that needs to be paid to the Ministerio Publico Federal (MPF), which is the Public Prosecutor’s Office in Brazil. It also has $52.77 million that will be paid to the Corrupt Practices Investigation Bureau (CPIB) in the next three years less any penalties paid by Keppel O&M to MPF during this period. Keppel had already paid a penalty of US$105.5 million to the US Treasury in 2018. The company also paid $211.1 million to MPF that year.

Best to have Temasek involvement

Finding a buyer for Keppel O&M will prove difficult, though. Singapore authorities may prevent a foreign buyer from gaining control of Keppel O&M’s yards in the name of national interests. DBS Group Research believes the possibility of selling Keppel O&M to Chinese state-owned peers is “low” given the technical know-how protection and Singapore’s trading hub status.

A local buyer seems the likelier choice. Temasek Holdings has long been speculated to merge Keppel O&M with Sembcorp Marine (Sembmarine). Its wholly owned subsidiary Kyanite Investment Holdings had last year made a partial offer for a 30.55% stake in Keppel.

But in August, Temasek invoked the material adverse change (MAC) pre-condition and withdrew its partial offer. This came after Keppel failed to fulfil the MAC clause that required the company to report not more than a 20% decline in its 12-month trailing earnings of about $557 million.

The move, if it had gone through, would bumped up Temasek’s stake in Keppel to 51.95%. With a controlling stake in SembMarine, Temasek would have one half of what it needs to realise a combined entity. And if the partial offer made by Kyanite was not withdrawn, Temasek could have had the other half of what it needs to proceed with that scenario.

At Temasek’s briefing on Sept 8, executive director and CEO of Temasek International Dilhan Pillay said it is up to the boards of Keppel and Sembmarine to decide on their business models and how to move forward. “It’s not really for us to direct things at all. That’s not our governance framework. So, I think that’s very much up to the boards of each company as to where they see their journey going forward,” he added.

Loh, however, shared a different view. While Temasek is an “important” stakeholder given that it is Keppel’s single largest shareholder, he noted that if Temasek intends to merge Keppel O&M with Sembmarine, this would be communicated to the boards of both companies. “I think Temasek will manage the affair of its investment through the listed boards,” he said. “This is how I believe it will go down.”

Temasek — despite the offer withdrawal — still represents Keppel’s best choice of a buyer or at least to facilitate a buyer. The Singapore state investment firm was after all instrumental in demerging Sembmarine from its then parent company Sembcorp Industries in June. Why can’t it play an instrumental role again in merging Keppel O&M and Sembmarine?

A combined entity comprising both companies would rank it as among the biggest O&M players in the world. It would also place the enlarged company in a better position to bid for contracts as it achieves lower economies of scale. And of course, the combined entity would still safeguard Singapore’s national interests.

Whether or not Temasek will get involved in Keppel’s strategic review of Keppel O&M remains to be seen. But the bottom line is: Keppel will need to get Keppel O&M off its back — with or without Temasek. The company cannot afford to be weighed down by the O&M unit as it seeks to secure its future.