SINGAPORE - Keppel Corporation and Sembcorp Marine (Sembmarine) are exploring a potential combination of Sembmarine and the offshore and marine unit Keppel O&M.

Non-binding talks are at a preliminary stage and there is no certainty that the deal will eventuate, both companies said on Thursday (June 24).

It is envisaged that the combined entity will be a listed firm with Sembmarine shareholders holding stock in it. Keppel will also receive shares and a cash consideration of up to $500 million, or a cash equivalent.

Keppel chief executive Loh Chin Hua said it would take a few months to reach a definitive agreement and finalise factors such as the relative number of new shares to go to existing investors.

It will also take time to gain shareholder and regulatory approval, Mr Loh told a briefing on Thursday, adding: "By the time the intended transactions are completed, we'll probably be well into 2022."

Both companies said the aim is to create a stronger combined entity over the long term for Keppel O&M and Sembmarine and their respective stakeholders given dramatic changes in the global marine, engineering and energy sectors.

These changes include a sustained reduction in oil exploration and development activity, which has significantly reduced business in the O&M sector.

The prolonged downturn has been exacerbated by the impact of Covid-19, the fall in oil demand and prices in 2020, and the global energy transition away from oil, said Keppel and Sembmarine.

The new firm would create a stronger player to capitalise on growing opportunities in the O&M, renewable and clean energy sectors, they said, adding: "The combined entity would be better positioned to compete for larger contracts, whilst pursuing the synergies that can arise from the increased operational scale, broader geographic footprint and enhanced capabilities of a larger entity."

Both companies said the combined company will bring together talent, engineering skills, intellectual property and complementary yard capabilities to allow it to better compete in target markets.

Keppel also signed a non-binding agreement with Kyanite Investment Holdings, a wholly owned Temasek Holdings unit, for Keppel O&M's legacy rigs and other assets to be sold to a separate company that would be majority owned by external investors.

Keppel O&M and Sembmarine also said they will take a "constructive and consultative approach" towards labour considerations during the discussions, noting that there will be a focus on preserving operational strengths and continuing to attract and retain local talent.

Both have also pledged to work with trade unions on plans for the labour force, including continuing workforce development and training and the creation of higher value-adding jobs.

Keppel Corp and Sembmarine both requested the Singapore Exchange halt trading in their shares pending Thursday's announcements.

In January, Keppel said it was exiting the rig business following a strategic review, and that Keppel O&M would pivot to clean energy.

Keppel O&M would stop building offshore drilling platforms after the oil price crash saw it post record losses of $1.19 billion last year.

Sembmarine, meanwhile, was recently fully demerged from its parent, Sembcorp Industries.

Investment firm Temasek Holdings, the biggest shareholder in Keppel and Sembmarine, dropped its plan last year to take a controlling stake in Keppel following the company's poor financial results.

Keppel shares closed up 1.2 per cent to $5.11 on Wednesday before the trading halt, while Sembmarine stock added 0.2 cent to 19.1 cents.