Singapore rig builders Keppel Offshore & Marine (Keppel O&M) and Sembcorp Marine are exploring a merger valued at more than $2bn following tough years in the oil and gas sector.
The idea is to deal with loss-making Keppel O&M's legacy rig assets as the parent Keppel Corp group moves more into renewables.
A non-binding memorandum of understanding was announced on Thursday to "create a stronger player in the offshore and marine sector, and provide a solution for Keppel O&M’s legacy assets, which will be monetised over time", Keppel Corp said.
The parent group will receive shares worth up to SGD 500m ($372m) in the combined entity, which it will distribute to shareholders. A cash payment to Keppel will also be involved.
The deal includes a parallel agreement with Kyanite Investment Holdings, part of Singapore state investment company Temasek, to sell all Keppel O&M's completed or unfinished rigs.
These will go to a separate holding company, to be owned by external investors.
Keppel Corp will retain a stake of up to 20% in this new company, while Kyanite will find new shareholders for the rest.
Temasek is already a shareholder in Keppel Corp.
The merger will accelerate Keppel's previously announced pivot towards new energy and decarbonisation solutions, such as offshore wind.
Keppel O&M's interests in Floatel International and Dyna-Mac Holdings will be excluded from the combination.
The final element of the transaction is the formation of a 50/50 joint venture between Keppel Corp and the merged company, which will allow the parent group continued access to the new entity for its own projects.
"Over the past few decades, Keppel has been regularly transforming itself to stay competitive and seize new opportunities," Keppel Corp chief executive Loh Chin Hua said.
"The proposed restructuring will allow us to further enhance the alignment and synergy across our business segments."
The group has previously announced it is selling its logistics business.
These deals will make the group much more streamlined, asset-light and focused, Loh believes.
Keppel O&M contributed almost SGD 8bn in net profits to the group over the decade from 2006 to 2015, but business has since been hit by years of oversupply, weakness in oil prices and a fall-off in new orders.
"Consolidation is needed simply because of competition and the need for bigger working capital to take on new and bigger projects," said KGI Securities analyst Joel Ng.
Sembcorp has a market value of SGD 2.4bn, while Keppel Corp is valued at SGD 9.3bn.
Keppel's shares have fallen by 15% over the past year. Sembcorp's value has plunged 40%.
Last year, Temasek scrapped a $3bn move to raise its stake in Keppel Corp and take control, following Keppel's poor performance.
In May, Keppel O&M was one of the Keppel Corp yards involved in winning a new contract together with South Korea's Hyundai Heavy Industries to build a $2.3bn floating storage and regasification unit for Brazilian oil major Petrobras.
The Singaporean group will fabricate the 43,000-tonne topsides modules at its shipyards in Singapore, China and Brazil, while HHI will build the hull and living quarters for 240 people.