Keppel Corp wades into deep water to battle Korean rivals

SINGAPORE (Reuters) - Singapore's Keppel Corp, the world's top offshore drilling rig builder, boasts an US$11 billion order book that will likely lift profits this year as those rigs start to take shape.

There is one order that isn't on the books: the company's first drillship - designed to probe for oil and gas in deep water - which Keppel is building before even landing a customer.

With a likely price tag above US$500 million, it's a big bet that demand is hot enough to warrant the speculative risk, and a challenge to South Korean rivals who dominate this segment.

Keppel's forte is jackup rigs - mobile platforms on extendable legs - which are made for shallower water up to about 500 feet (152 meters). Drillships can operate in water as deep as 12,000 feet.

Deepwater projects accounted for 44 per cent of global spending on offshore oil and gas field development last year, and that's expected to rise to more than 54 per cent by 2018, according to Infield Systems, an energy research firm.

Consultancy Douglas Westwood forecasts global spending on offshore oil and gas exploration and production will grow 15 per cent this year to US$135 billion, and hit US$164 billion in 2016.

Two of Keppel's big South Korean rivals, Samsung Heavy Industries Co and Daewoo Shipbuilding & Marine Engineering Co, have started building jackup rigs, prompting Keppel to test out deeper waters.

"After Samsung and Daewoo broke into the jackup market, Keppel is trying to hit back and show they can break into the drillship market and have the ability to compete with the South Korean yards," said James Hearn, an Infield analyst.

An official at a Korean shipbuilder that also makes drillships said: "Keppel has long experience in rigs and semis (semi-submersible rigs) and has good relationships with drilling firms. It has no track record yet, but could make its mark in drillships over time." The official didn't want to be named as he was not authorised to speak to the media.

Keppel took home orders worth about $7 billion in 2013 - primarily for jackup rigs - pushing its total outstanding orders to a record $13.6 billion at end-September, and raising hopes that profits will rebound this year. Booked orders start earning revenue once they are one fifth completed.

Full-year results from Keppel, more than a fifth owned by state investor Temasek Holdings, are expected to show net profit dropped 21 per cent last year to $1.51 billion from a record $1.91 billion in 2012, when it reported a surge in sales in its property division. The results are due later on Thursday.

But 2014 earnings will likely rebound as some of the rigs on the order book start to contribute profit. Also, margins are expected to improve as Keppel gets more efficient in building rigs of its own design. A Reuters poll shows analysts expect 2014 net profit to rise 6 percent to $1.6 billion.

"In Keppel's case, the backlog is impressive because a large majority of the contracts are repeat orders of its proprietary design, which we can expect them to deliver a good margin on,"said Clement Chen, a Barclays analyst.

"Given the strong contract momentum in 2013, it should translate into good margins and profitability in 2014-16, as these contracts are delivered."