Rowan impact on Keppel

Thursday, July 16, 2009

Rowan had previously placed newbuild orders for four Super 116E class Jackup rigs (EXL #1 to EXL #4) with KepCorp. KepCorp is proceeding with the construction of the first three jackups for Rowan with no change in schedule. The last rig continues to have a suspension of construction based on goodwill rendered by KepCorp to Rowan. KepCorp will resume the building of the forth rig in 3Q2009 (unless Rowan officially cancels the construction and pays penalties. Rowan's decision will likely be made during 3Q09 results). At this point in time, we have indications from KepCorp that they "think" Rowan will be resuming the construction.

Rowan has revealed in their investor communications that they are committing about US$273m for the rigs being built at Keppel for 2009. As we know it, all three Jackups have no contracts on hand. While this is a concern, Rowan has a significant number of assets (22 offshore jackups and 30 land rigs) that are operating and generating cash flows.

While 2009 might still show good performance in view of its previous year orderbooks, KepCorp has not won any newbuild contracts for its Offshore division for about 1 year. From our recent visit to KepCorp, management expects the gap to affect its 2010 earnings substantially.

We have a HOLD rating on KepCorp with a fair value of S$6.40. Entry at about S$6.10-6.20 can be explored if your clients are long term investors.


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