COLUMN | A tale of restructuring: Keppel (kind of) quits the rig building business (but not really), Borr Drilling, Grupo R, Guangdong Zhenrong – Part One [Offshore Accounts]

Keppel O&M shipyard in Singapore (Photo: Keppel)

Headlines don’t tell the truth

Last week saw a major strategic announcement from Keppel Offshore and Marine. Four or more separate publications, including the venerable Straits Times in Singapore, several industry websites, and Channel News Asia, ran headlines declaring, “Keppel to exit the offshore rig-building”.

US$380 million loss at Group Level

Clearly, that is what Keppel CEO Loh Chin Hua wants you to believe, as he reported a net loss of SG$506 million (US$380 million) at Group level for 2020 (here). This loss included impairments of SG$952 million (US$716 million), which were mainly due to the offshore and marine business, and were first reported in the second quarter results.

Now, Mr Loh is trying to bury the past and create a new Keppel focused on green energy and renewables, including building the world’s first American-built and flagged jackup offshore wind turbine installation vessel, Charybdis, for Dominion Energy, which we reported here.

Reports of Keppel’s exit “grossly exaggerated”

“The report of my death has been grossly exaggerated,” as Mark Twain once told a reporter in 1897, and so the “Keppel exits” headline is eye-catching, but untrue. Keppel will be building rigs for years to come. Keppel wants to exit rig-building, but is so far up to its eyeballs in its past mistakes and legacy contracts that it will be building and owning rigs until at least 2030, if its past announcements are correct.

Can Do Lah? Keppel’s rig problems on multiple fronts

Last week (here) we covered the many woes of Singapore’s Keppel O&M in Brasil, where the shipyard has multiple fines for bribery and has seen its main customer there go spectacularly bust in a corruption scandal, leaving the remnants of four partially completed rigs on Keppel’s books and rusting in its yard. And its lawyer, Jeffrey Chow, was left with a corruption conviction in the US, time served in prison, and a US$75,000 fine. He should have just completed his parole before Christmas.

Keppel also owns a speculatively built drillship called Can Do, which it ordered to showcase its deepwater rig-building capabilities in Singapore (here). Rather hilariously and unpatriotically, the Singaporean yard appears to have flagged the nearly finished unit to Liberia.

Can Do was to have been the first operational drillship capable of handling a 20,000 psi blowout preventer, an honour which Transocean now looks likely to take with Deepwater Titan, which Chevron demanded be upgraded to 20,000 psi operations when it commences its contract with the US major at the end of this year.

Borr’s Mexican problems hit Keppel

Unfortunately, it is not just semi-subs in Latin America and drillships at home where Keppel has problems: in Singapore it has an unpleasant challenge involving its largest customer and five nearly finished jackups that were originally contracted at around US$200 million apiece in the boom years of 2012 to 2014. That customer is Borr Drilling, and the magnitude of Borr’s many problems (covered by us here in December) can be seen in its latest investor presentation of January 21, here.

Borr is in a desperate situation – its main customer, Mexican the state oil company Pemex, has been late paying Borr, under a series of awful integrated drilling contracts, which leave Borr’s 49 per cent owned Mexican affiliates unable to even invoice the indebted customer, let alone collect revenue to pay bareboat hire to Borr for its rigs.

Worse, the Financial Times has reported here how Pemex is now the world’s most indebted oil company, with US$110 billion in debt – yes, billion with a “B” – and another US$84 billion of unfunded pension liabilities. Pemex is a basket case, its debt has been downgraded to junk status, and it will probably need to raise another US$10 billion in loans this year to stave off default.

Borr squeezes Keppel

Faced with its cash crunch and the catastrophic meltdown in the rig industry in 2020, Borr started squeezing Keppel for better terms. It has now obtained them – the footnotes of the Borr presentation show that delivery of the five newbuilds has now been shifted to dates ranging from May to December 2023, although Keppel’s warranties have been allowed to lapse.

Strange that Mr Loh omitted this pertinent fact of the new delivery dates on the exit timing from his ebullient press release on the restructuring.

Borr will now make Keppel the following rather paltry cash payments: US$6 million in 2021, then US$12 million in 2022, and US$18 million on May 1, 2023. Interest payment dates on yard loans from Keppel have been deferred by one more year, and now only commence on the fourth anniversary of delivery (i.e. in 2027, I think), whilst the maturity date of the US$252 million loan from Keppel to Borr has been extended by one more year.

Keppel is effectively acting as a bank funding Borr, which is itself providing working capital to Pemex, the world’s most indebted oil company and the world’s fifth most indebted company according to Global Finance magazine (here). Not a nice place to be. And not what either Borr or Keppel’s shareholder’s signed up for. If you want to buy junk bond exposure in Latin America, you don’t need Borr as an intermediary with its US$28 million of annual shore overhead cost to support to access it.

Keppel has US$892 million exposure to Borr

Shockingly, the presentation confirms that Keppel has a total exposure of US$892 million to Borr on the loans and its five newbuildings. On its own, that might not be a problem, except for the fact that Borr has another US$1.7 billion of debts on top of that US$892 commitment to Keppel, including a debt of US$753 million to Keppel’s Singaporean rig-building compatriot SembMarine (through its PPL Shipyard subsidiary).

A rough calculation shows that Borr has debt of US$92.5 million per rig across its 28 rigs, which is unfortunate when we consider that Shelf Drilling recently sold a similar rig to the state oil company of Abu Dhabi for US$77.6 million (here). Negative equity anyone?

Montezuma’s revenge on Keppel

It would be easy to blame Keppel’s woes on Borr, but actually they go much further back than Keppel’s decision to extend credit to Borr to help it buy the five rigs in 2018. This was actually a mutually agreed rescue attempt by Borr, as Keppel sought to recover its position from the nasty financial consequences of some earlier dalliances with penniless Mexican clients, and its own ill-advised speculation.

The rigs that Borr purchased and have now delayed delivery on until 2023 tell a sad tale. Two are the former Paraiso 1/Cantarell V and Paraiso II, ordered by a Mexican company that quickly defaulted on the contract.

Hild (Photo: Keppel)

The third is the former TS Topaz, which was renamed by Borr as Hild. This was ordered by a 25 per cent subsidiary of Falcon Energy (here). Falcon is the 87 per cent owner of CH Offshore, the anchor handler operator, and recorded a US$11 million loss when it lost the deposit in 2018 (here).

The other two rigs were completely speculative units ordered by Keppel itself as a chance to make a quick buck and flip when the market was sizzling in 2014 and the oil price was US$100 per barrel. That didn’t work out so well.

Grupo R – sale and leaseback

Additionally, Keppel only managed to get two more rigs across the line for its Mexican customer Grupo R by doing a sale and leaseback. Keppel completed the rigs Cantarell III and Cantarell IV, then bought them from Grupo R immediately upon delivery, and bare-boated the units back to the Mexicans in 2019. With Pemex’s payment problems, one wonders whether Grupo R is currently paying Keppel on time, but don’t expect to find answers to questions like that in Keppel’s rather skimpy public accounts.

Grupo R originally paid a 20 per cent down payment of the rigs’ original contract value when the contract was signed in 2013, but it seems that Keppel had to finish the rigs with its own capital and then collect the bareboat over five years for one, and ten years for the second.

This sounds complicated but just means that once again Keppel is acting as a de facto bank to a Mexican entity – actually two Mexican entities if Pemex is delaying payment to Grupo R. Since Cantarell III only started its ten-year bareboat in the first quarter of 2020, it is likely that Keppel will very much be in the jackup business until 2030.

Worse than Borr: Fecon, Clearwater and TS Drilling

Who are Fecon, Clearwater Capital and TS Drilling, you may ask? Probably you have never heard of them, and certainly Keppel doesn’t seem to have heard much of them either, not since they signed rig-building contracts and paid deposits for their five rigs, which now remain unfinished in Singapore. At least Keppel has a plan to collect the cash from Borr for the five rigs it has delayed, and at least Borr is a publicly listed company with a track record in drilling.

Keppel has these five other jackups sitting at its Singapore yard, where the owners seemingly have no hope of fulfilling the 80 per cent final payments on the US$200 million newbuilding contracts they signed. These are three rigs belonging to Fecon International, which has, apparently, “been seeking partnerships with established drilling contractors to help them,” put the three rigs to work. Strangely, the Fecon phone has not been ringing off the hook with call backs from Seadrill and Maersk Drilling from this request.

Photo: Fecon International

The rigs are the imaginatively named Fecon 1, Fecon 2, and, er, Fecon 3. Westwood Energy have reported that Fecon is a vehicle for a gentleman known as A. P. Dobrov, “who has been described as a Russian industrial entrepreneur”. Fecon’s very scant website is here.

Exotic background to Mr Dobrov of Fecon

Mr Dobrov’s current whereabouts are unknown. Quite possibly, a Russian investigative website called perhaps covers some of his early business career up to 2011 here, including the sale of his company Belon to Magnitogorsk Metallurgical Company.

Clearwater Capital – three flips and a fail

Clearwater Capital was a financial institution that decided the sizzling rig market was a great chance to make a fortune by ordering rigs at Keppel and flipping them, until it wasn’t. Co-founded by Rob Petty, Clearwater managed to flip its first two rigs at Keppel to Standard Drilling whilst still under construction, and also sold Standard two option rigs as well.

Buoyed by success, Clearwater then ordered two more jackups at Keppel in 2013, one of which was flipped to the Arabian Drilling Company in early 2014. Then the oil market crashed, rig demand dried up, and Clearwater took the correct and rational decision to forfeit its deposit and walk away, leaving the rig in Keppel’s hands where it remains today.

Introducing Dr Xiong Shaohui – of TS Drilling and elsewhere

TS Drilling is much more interesting. TS ordered an extremely high-specification, North Sea harsh environment rig known as TS Jasper in 2014. It was to be the first jackup rig built to Keppel’s new proprietary KFELS N Plus design, which could operate in water depths up to 150 metres deep.

Incredibly, Keppel announced that the value of the newbuild contract with TS Offshore was around US$500 million. I thought that was a typo, as well, but here it is in plain sight in the Keppel press release. That makes it the most expensive jackup ever ordered – and the most expensive ever defaulted upon.

Keppel, and reports from Wood Mackenzie, suggested that when delivered, this super-expensive rig would be deployed in the East China Sea for China Oilfield Services, but that it would also be built ready to operate in the North Sea.

“The KFELS N Plus rig is a robust and cost-efficient rig with distinctive safety and operational features,” commented TS Offshore chairman Dr Xiong Shaohui, as stated in a Keppel press release. “It is one of the world’s most advanced rigs of its class with better drilling capabilities, a superior cantilever load performance, a larger deck space, a higher variable load and enhanced accommodations. We are confident it fills the gap for ultra high-specification rigs needed in the Eastern China Sea or almost anywhere in the world with a need for high-specification and deepwater jackup rigs.”

The one and same Dr Xiong Shaohui?

Would this be the same Dr Xiong Shaohui who was the chairman of the Chinese commodity trading company Guangdong Zhenrong, which defaulted on 21.5 billion yuan (US$3.3 billion) in loans to more than 20 banks as of April 2017, and went into bankruptcy administration in 2019? The chairman of Guangdong Zhenrong, where the Chinese state media reported that billions of yuan had mysteriously disappeared from its books? See here and here.

The same Dr Xiong Shaohui, who was trying to buy an oil refinery in Curacao to process Venezuelan crude (here), whose company was kicked out of Myanmar (here), and where, “auditors said the company has arranged complicated trade deals among affiliated companies to beef up revenue and obtain credit,” in the words of Caixin magazine?

Dr Xiong Shaohui’s current whereabouts are unknown, which is usually the case when you are alleged by the Chinese media to have embezzled money from state banks there.

Failure of due diligence?

One wonders what due diligence Keppel performed on the said TS Offshore, given that as early as 2012 Thomson Reuters was reporting here that Guangdong Zhenrong was trading petrol with Iran in violation of international sanctions, two years before the newbuilding contract on behalf of TS Offshore was signed by its chairman Dr Xiong Shaohui.

Do remind me of who was the CEO of Keppel when the contract with Dr Xiong Shaohui and TS Offshore was signed? Keppel’s website provides some clues:

“Mr Loh Chin Hua is the Chief Executive Officer and Executive Director of Keppel Corporation. He was appointed as Chief Executive Officer in January 2014, after having served two years as Chief Financial Officer of the Company.”

The great exit is not happening at the board

So, it is fair to say that Keppel’s problems are much wider than the bankruptcy of Sete in Brazil, the challenges facing Borr in Mexico, and the bribery fines, or the legal dispute it has with Awilco over the cancellation of the construction of two harsh environment semi-subs, or the problems facing its 49 per cent affiliate Floatel International, an owner of offshore accommodation units, which has US$475 million of bonds in default and another US$115 million owed under a bank facility (here).

What is the solution? You might have thought that it would be bringing in a new management to clear out the discredited place-men who got the company into this mess, but you’d be wrong.

Comprehensive transformation

You can read the details of the “comprehensive transformation” here.

Keppel says it, “will exit the offshore rig building business, after completing the existing rigs under construction.” Given that it has six unfinished rigs in Brazil, four that it owns and two be to purchased by Magni Partners, and at least thirteen in Singapore, this might take a while.

In its announcement, Keppel committed not to, “undertake any new project requiring large upfront capex or without milestone payments.” Given the generous payment terms extended previously, this is definitely wise, but it seems like closing the stable door after the horses, probably a herd of wild Mexican geldings ridden by a Guangzhou cowboy, have already bolted.

“Transient entities”

As part of this restructuring, Keppel’s offshore business will be restructured into three parts: a rig company and a development company, both of which Keppel claims, “will be transient entities created to hold its approximately SG$2.9 billion (US$2.18 billion) worth of completed and uncompleted rig assets”.

How this value of US$2.18 billion was reached is unclear, but is crucial to the viability of the Keppel balance sheet going forward. Are the two sale and leaseback rigs to Grupo R included in this figure?

In the worst case, Keppel is perhaps carrying the value of all the nineteen rigs that we have identified as not completed at its yards in this figure, a calculation which then values them at more than US$100 million each. I reiterate that Shelf Drilling recently sold a nearly new jackup to the state oil company of Abu Dhabi for just US$77.6 million. Keppel shareholders should be asking how solid this US$2.18 billion valuation actually is, and on what basis it was made.

The second question for all those heralding Keppel’s supposed exit from the rig business is how long those “transient entities” will be hanging around, given that many of the assets involve contracts first signed seven or eight years ago. The tenure of the CEO at Keppel might reasonably be more transient than the rigs left behind when he finally leaves.

Why not sell the abandoned rigs? Why indeed not?

The rig company, “will put the completed rigs to work or sell them if there are suitable opportunities,” Keppel claims. This is not exactly a new strategy, given its deal with Borr in 2018.

But now, “a dedicated team will be appointed to support its chartering and marketing activities,” Keppel said. Appointing such a team might have crossed their minds earlier. Even the Chinese government managed to come up with SinoOcean in 2019, to do just that for its own stranded offshore assets (see a wonderful state media report here).

In order to reassure shareholders that Keppel doesn’t intend to keep the rigs that have been on its books for the better part of a decade, the press release was at pains to state that, “this will only be a transitional arrangement. As the oil market recovers, utilisation and day rates improve, and the rigs generate steady cash flow, the rig company will sell the rigs or collaborate with Keppel Capital to seek funding from external investors… [it] is expected to be self-sustaining and would only require limited initial funding to maintain the rigs.”

Hope springs eternal in Singapore

Anyone who has read Keppel’s previous annual reports will know that hope springs eternal that the oil market will recover and that utilisation and day rates will improve, providing salvation for management and shareholders alike.

The same optimism hasn’t prevented most major drilling companies, subsea companies and owners of offshore supply vessels from going bankrupt in the last five years. Very few offshore businesses have proved “self-sustaining” in these last six years of misery. There’s very little evidence of financial sustainability for many offshore companies ahead in 2021, either.

The flotilla of uncompleted rigs will come under the development company, which Keppel said, “will focus on completing the rigs, while prudently managing cashflow. Priority will be given to completing rigs that have firm contracts with customers. The development company will be wound up, once the rigs have been completed and delivered to customers, or transferred to the rig company, where they will be put to work or sold.”

Another US$376 million wanted

Then came the kicker. The development company, “would require some initial funding from Keppel, after which it is expected to operate independently.”

How much exactly? The release continues, “The rig and development company are collectively expected to require about SG$500 million (US$376 million) in net funding, mainly for the latter to complete the rigs. This will be provided progressively by Keppel Corporation and repaid over time.”

So, having written off hundreds of millions and paid hundreds of millions in fines, Keppel now intends to spend hundreds of millions more to complete unfinished rigs in a market where rigs of less than ten years old are being sold for scrap – a market that is grossly over supplied, where asset prices have collapsed and where Korean and Chinese yards are holding similar nearly finished assets.

Wrong in China, wrong in Brazil, wrong in Singapore

We have rightfully condemned the Brazilian and Chinese states for adding to global overcapacity by trying to restart the construction of dead rigs with state funds in our “Falling knives” columns (here and here). Now a Singaporean company wants to do the same?

This is a bad idea. Keppel should scrap as many of its half finished rigs as it can, or convert them into wind turbine installation vessels, if possible. In fact, Keppel could probably IPO a wind turbine installation company a damn sight faster than trying to flog a portfolio of abandoned oilrigs.

Keeping stale assets on its books in the hope that one day they may turn around is bad business for Keppel, no matter into which division they are shuffled.

“Asset-light and people-light”

The remaining rump is what Keppel describes as, “an operating company, comprising the rest of Keppel O&M, which will be transformed into an asset-light and people-light developer and integrator of offshore energy and infrastructure assets… It will be people-light and asset-light, with fabrication work subcontracted to its eco-system of contractors, including other yards… Keppel’s yard operations will be streamlined, including repurposing or divesting part of its global network of yards. At the same time, the operating company will invest in capability building as it seizes new opportunities.”

So, Keppel will be firing its staff, and closing many of its yards, but in a PR-friendly way.

“The operating company will exit the offshore rig building business, and progressively exit low value-adding repairs and other activities with low bottom-line contribution. It will seek opportunities in floating infrastructure and infrastructure-like projects that can deliver predictable streams of cashflow, including renewables projects such as offshore wind farms and solar farms, gas solutions, production assets and new energy solutions such as hydrogen and tidal energy.”

Floating data centres were also mentioned, harnessing the cooling power of seawater, presumably.

“The restructuring will start with immediate effect and is expected to be executed over the next two to three years,” the announcement concluded.

Name change and refinement of vision

Satirists of the world celebrate, however, for like Cadaver Cadeler (former Swire Blue Ocean) and Emetic Eneti (former Scorpio Bulkers), Keppel concluded that it. “will carry out a rebranding exercise and refine its vision and purpose.”

If Keppel has problems with its vision, there are some great opticians in Singapore who can help, I am sure (here). This is going to be the gift that keeps on giving, and we eagerly await what great new name Keppel has chosen, as it follows in the footsteps of DONG (now Ørsted).

It’s obviously going to be horrible for the individuals who lose their jobs in this wave of retrenchments and yard closures at Keppel. Good luck to them.

I believe that Keppel’s plans to press ahead with its mothballed rigs is madness. Given the evidence above, we can think of one person who deserves to lose his job ahead of most of his colleagues.

Step forward, Mr Loh Chin Hua, CEO since 2014.

Coming next… there’s more

I had big plans. This week I was going to write a dramatic comparative piece on the wave of restructurings ripping through the offshore industry. I was going to compare three Oslo-listed companies that have recently undergone dramatic restructurings: Seabird Exploration, Siem Offshore, and Polarcus, opening with a dramatic quote from Charles Dickens that seems to capture the spirit of the age of 2021 as much as 1789:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…”

But then I started writing about Keppel, and got side-tracked – four thousand words of side-track. However, Oslo, you’re on notice that you’re next.


A reader wrote to chastise me for a factual error in my piece in Elon Musk buying two Valaris semi-subs for conversion to rocket launch platforms for SpaceX (here).

The former Ensco rigs, now named Phobos and Deimos, will actually be used to launch SpaceX’s Starship and its Super Heavy booster. The Starship sits on top of the Super Heavy and they have a combined height of 120 metres.

The Falcon Heavy, which we mentioned in the article, has already flown from Cape Canaveral a number of times (it’s the one with the side boosters that come in to land simultaneously) and apparently will not be launched from the former oil rigs.

The following two videos show the difference: (Falcon heavy) (Starship)

If you see any mistakes in any of my writing, please don’t hesitate to contact the editor.

Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.