KS Energy Services Ltd: Rights issue of warrants

Rights issue of warrants. KS Energy Services Ltd (KS Energy) has proposed to undertake a renounceable non-underwritten rights issue of up to 92.747m warrants at an issue price of S$0.20 for each warrant. Each warrant carries the right to subscribe for one new ordinary share at an exercise price of S$1.40 on the basis of one warrant for every four existing ordinary shares held by entitled shareholders, fractional entitlements disregarded. Several key shareholders have given their irrevocable undertakings to subscribe for the entitlements.

Previous agreements. The group has previously entered into a subscription agreement (dated 6 Jun 07) with Sovereign Assets S.A pursuant to which warrants were issued; the full exercise will amount to an issuance of 9m shares (subscription shares). There are also three bond purchase agreements (dated 23 Jul 07) with Centar Investments (Asia) Ltd, Stark Asia Master Fund Ltd and Stark Master Fund Ltd pursuant to which convertible bonds were issued; the full conversion will result in an issuance of about 25.3m new shares (conversion shares).

Proceeds for general working capital. Including the subscription shares and conversion shares, 92.747m warrants will be issued, assuming full subscription and exercise of the current warrants issue (maximum subscription scenario). This will raise about S$18.2m in net proceeds from the warrants issue. A minimum subscription scenario outlined by the group delineates that about 84.2m warrants will be issued, and the estimated net proceeds will be about S$16.48m. KS Energy intends to use the net proceeds for general working capital.

Maintain HOLD. Although the upfront estimated net proceeds does not seem very substantial compared to the group's cash level (about S$70.6m as at 31 Mar 09), proceeds from the exercise of warrants are considerable (about S$118m assuming full exercise and minimum subscription scenario). This will provide additional financial flexibility to the group (as of 31 Mar 09, ST debt: S$145.9m, LT debt: S$200m, net debt-to-equity ratio: 0.69x). Together with Dubai-based Dutco, the group may also look into acquiring assets during this downturn. We are raising our fair value estimate to S$1.36 (prev S$1.10) based on 9x FY09F PER for the distribution business and 10x peg for drilling and related businesses due to the current re-rating of the sector, but maintaining our rating at HOLD.

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Swiber Holdings: Concerns of financing and a declining orderbook still present

1Q09 results review. Swiber Holdings (Swiber)’s 1Q09 revenue grew 23% YoY to US$87.1m on the back of increased activities in the offshore construction projects in Malaysia, Brunei, Indonesia and India, but declined 15% QoQ. This flowed down to net profit of US$11.9m, which saw an increase of 15% YoY (and a turn-around from 4Q08). Adjusting for gain on disposal of assets of US$3.5m, core operating profit was US$11.6 (above our estimates of US$9m). Operating profit margin of 13.3% was a reversal from 4Q08’s margin of -16.7%, but a decline of 5ppt on a YoY comparison. This was also better than our expectation of 9%.

Nonetheless, financing is still our key concern. Swiber’s net debt to equity ratio stood at 0.94x as at 31 Mar 09 due to debt repayments and sale-and-leaseback arrangements. Going forward, financing is still our key concern. We note that the repayment of Swiber’s non-current bonds would be due in 3Q10 (US$71.2m) and due in 1Q11 (US$72m).

Declining orderbook is another worry. Swiber has an orderbook of US$515m as at 31 Mar 09 as compared to US$596m as at 31 Dec 08.

Target price under review. Maintain SELL. Over the past month, Swiber’s share price (+76%) has outperformed the STI (+12%) and its peers (+53%). We are currently evaluating our estimates, pending a talk with the management. Our target price is currently under review. We continue to be cautious on this counter, especially on financing concerns and weakness in earnings quality. Maintain SELL.

Keppel Corp: Skeie Drilling and Production may face difficulties in paying for its three jackup rigs under construction

Skeie Drilling and Production may face difficulties in paying for its three jackup rigs under construction

1) Skeie Drilling & Production (SKDP) may seek company liquidation if no agreement with its bondholders were reached by 4 June 2009.

According to SKDP yesterday, there was to-date no agreement with a group of its secured bondholders on its financial and rig construction re-structuring proposal. Further negotiations have not been fruitful, with the bondholders' counter proposals rejected.

As a recap, SKDP's re-structuring proposal (initiated on 17 April 2009) has expired on 31 May 2009, including the possibility of extending the delivery schedule for rig construction contracts with Keppel Corp (KEP), and the underwritting commitment from SKDP's main shareholder, Skeie Technology and Wideluck, for possible US$85m equity fund raising.

2) SKDP is now behind its progressive payment schedule for Rig 1 (with US$37m milestone payment due on 31 May), and may miss the US$40m payment for Rig 3 on 4 June.

For Rig 2, SKDP's inability to raise US$18m of new equity by end May implies a breach under the Prodjack 1 bond loan agreement, as the jackup rig is still without a charter contract. Collectively, SKDP may also risk the termination of US$675m in bank loan commitment to finance the three rig construction with KEP, if the contractual breaches for these projects are not resolved.

3) SKDP's Board of Directors now believes SKDP is insolvent, and could be illiquid if no re-structuring agreement could be reached.

As a last step to avoid its filing for bankruptcy, SKDP's Board of Directors will now seek "irrevocable pre-acceptances from a qualifying majority (2/3) of the three SKDP secured bond loans and the convertible loan to the proposal as set out in the SKDP announcement dated April 17 and as described in the SKDP Company Presentation dated April 17 posted on the company's web-page www.skeiedrilling.com".

If these conditions can be met by 4 June 2009, and pending a follow-up formal votes from all bondholders, SKDP will then seek extensions to the agreements with its main shareholder and KEP as per the re-structuring proposal on 17 April.

4) SKDP is one of KEP’s top 3 customers.

SKDP currently has construction contracts for three N-Class Jackup offshore drilling rigs with Keppel FELS shipyard in Singapore. We estimate that the contracted value for the three orders were S$1.7b, with an estimated S$0.8-1.0b worth of contracts yet to be recognised (or 8-11% of KEP's current order book).

While there is a lack of information on the actual cash collected to-date by KEP for these three SKDP orders, we believe that the possibility for KEP to complete construction of the three rigs on its own is not high in the event of a default by SKDP, unless the total cash collected to-date is more than 50% of combined contract value. Maintain FULLY VALUED on KEP. Our fair value for KEP stays at S$5.13.