US$700 million loss? Singapore's offshore and marine giant hit hard by the pandemic

       Impact by the global economic downturn and oil price slump due to the COVID-19 pandemic, Keppel Offshore & Marine, a Singaporean offshore and marine giant, reported a massive loss of nearly US$700 million in the first half of the year, severely impacting Keppel Corporation's performance and potentially jeopardizing Temasek's approximately US$3 billion acquisition of Keppel Corporation shares.

According to Keppel Corporation's financial report, Keppel Offshore & Marine's net loss in the first half of this year reached S$959 million (approximately US$697 million), compared to a net profit of S$10 million in the same period last year. The loss was primarily due to impairment losses of S$890 million on contract assets, receivables, stocks, and investments. Excluding impairment losses, Keppel Offshore & Marine's EBITDA for the first half of the year was S$40 million.

Affected by the novel coronavirus pandemic and Singapore's preventive measures, Keppel Offshore & Marine's workforce in Singapore significantly decreased during most of the second quarter, dropping from approximately 24,000 in March to only about 1,200. Currently, the number of employees has recovered to approximately 5,000.

As of the end of June, Keppel Offshore & Marine's net order book totaled S$3.5 billion, ensuring a workload for at least two years. So far this year, Keppel Offshore & Marine has secured new orders worth S$107 million, involving offshore wind energy and floating production storage and offloading (FPSO) projects.

Keppel Offshore & Marine's substantial impairment losses impacted Keppel Corporation's performance. In the first half of this year, Keppel Corporation reported a net loss of S$537 million, compared to a net profit of S$356 million in the same period last year. Excluding impairment losses, Keppel Corporation's net profit for the first half of the year was S$393 million, a 5% year-on-year increase, thanks to the strong performance of other business units.

Keppel Corporation's revenue for the first half of the year was S$3.182 billion, slightly lower than S$3.315 billion in the same period last year. The revenue decrease was attributed to reduced income from China real estate transactions, electricity and gas sales, environmental engineering projects, and asset management. As of the end of June, Keppel Corporation's net debt-to-equity ratio increased to 1.0 times, compared to 0.85 times at the end of last year.

In the second quarter of this year, the pandemic affected the activity levels of all business units of Keppel Corporation, with revenue dropping to S$1.325 billion from S$1.784 billion in the same period last year, a decrease of 26%. In the second quarter, Keppel Corporation reported a net loss of S$697 million, compared to a net profit of S$153 million in the same period last year. The loss was mainly due to impairment losses and the decline in Keppel Offshore & Marine's performance.

Keppel Corporation's CEO, Loh Chin Hua, stated: “Despite the impact of the pandemic, most business units have remained resilient, supported by the essential services we provide. However, due to the impact of the pandemic on the global economy and oil prices, we had to absorb significant impairment losses in Keppel Offshore & Marine.

       Without these losses, Keppel Corporation's net profit for the first half of the year would have been higher than last year, even including the S$69 million loss from Keppel Offshore & Marine.”

“In this challenging environment, Keppel Offshore & Marine needs to further adjust its scale to ensure that its fixed management expenses are reduced to industry-realistic levels. To this end, the CEO and management of Keppel Offshore & Marine have voluntarily reduced their base salaries by 5% to 10%, demonstrating collective determination and setting the tone from the top. In line with Keppel Offshore & Marine, Keppel Corporation's senior management will also reduce their base salaries by 5% to 10%, while directors of Keppel Corporation and Keppel Offshore & Marine will reduce their annual fees by 10%.”

Keppel Corporation's significant losses have increased the uncertainty surrounding its transaction with Temasek. Last October, Temasek proposed to acquire an additional 3.06% stake in Keppel Corporation for US$3 billion, increasing its stake to a maximum of 51%, becoming the majority shareholder and gaining control. This transaction was considered a potential precursor to the merger of Keppel Offshore & Marine and Sembcorp Marine, paving the way for the integration of two global offshore and marine giants.

However, the conditions precedent for the Temasek transaction have not been met. Loh Chin Hua pointed out: “Due to the impairment losses, Keppel Corporation's performance over the past 12 months has not met the target of S$557 million in after-tax profit, violating the Material Adverse Change (MAC) clause in part of Temasek's offer. Therefore, unless Temasek decides to waive the conditions precedent, this transaction is unlikely to proceed.”