Deapsea Drillers In High Growth Mode (KPELY, SDRLF.PK)

Includes: KPELY, SDRLF
by: Travis Johnson

Some interesting news out on my two investments in the drilling arena over the last day or two.

I just bought shares of Keppel Corporation (OTCPK:KPELY), also referred to as KepCorp, on Monday, smack dab in the middle of its reporting season, so I knew there would be some action. So far, their subsidiaries have reported "ok" to weak earnings, which have caused a minor bit of profit taking -- Telecom and Transportation reported pretty flat earnings, and Singapore Petroleum reported that they're still having some trouble with pricing and margins, though I expect that to work itself out pretty quickly and they're certainly still pulling in nice profits even as they dip from recent highs.

On the positive side, Keppel Offshore and Marine, the critical part of the company for near-term growth, reported that they're upgrading two of their shipyards to handle drilling rig construction in anticipation of a big upsurge in Chinese demand for offshore drilling equipment. They noted earlier that they were planning this, and that they expect to continue to be able to take big orders -- even rush orders, they implied, if companies are willing to pay through the nose for pre-2009 delivery. They'll be releasing earnings for the conglomerate on Thursday this week, and has guided to 32% gain in earnings, with plenty of analysts expecting a lot of upside in the Offshore and Marine division.

My purchase was, as usual, probably pretty poorly timed in the short term -- I bought right at the new all time high. While it makes sense to buy some companies on the upswing if you see potential for significant growth to continue, it's quite possible that I overpaid, depending on how the shares react to earnings this week. So far, they've dipped back down by a couple percentage points on the Singapore Petroleum news. If they dip further on the earnings news, I'll have to consider adding to my position, but my best guess is that their earnings will beat expectations. and that any guidance they offer will be quite optimistic given the expected refining turnaround and the huge orderbook for the shipyards.

Speaking of shipyards, Keppel a few days ago christened the SeaDrill 3, the latest rig newbuilding for SeaDrill (OTC:SDRLF), a nice tie-in to the other updates I've been watching.

SeaDrill I also purchased quite recently, and they've been on a buying spree picking up other offshore drilling companies in order to consolidate the industry and quickly build up a large fleet of rigs and service and drilling ships. Their biggest purchase to this point has been Smedvig, a deal the ink isn't even dry on yet, and already rumors are swirling about their next target. Everyone knows John Fredriksen's reputation for moving quickly and aggressively in acquisitions, so any hint of the next step gets some good press.

And this time they issued much more than a hint -- the head of the new SeaDrill Management division, Hans Van Royen, who is also the former CEO of Smedvig, yesterday seemed to get a little bit too big for his britches in announcing their intended takeover of two companies, and he was quickly shot down by SeaDrill CEO and Fredriksen right-hand-man Tor Olav Troim.

Here's the first article from Reuters -- essentially, Van Royen said offers were out for the remaining shares of Apexindo and Eastern Drilling, and they expect to hear from those companies shortly. Tor Olav Troim was not mentioned in this article.

But shortly thereafter, Troim was quoted in an updated version essentially contradicting Van Royen said. That updated version seems to have disappeared from the free web, so here are the quotes from Troim:

"We have seen this as a possibility, but we have no plan to do it at all -- for the moment."

Van Royen is quoted as saying: "We are looking forward to taking over Eastern Drilling and we have given an offer ... and also to Apexindo. I think we will get their answers by the end of this month."

He said the buyout offer to Apexindo was made on Thursday while Eastern Drilling was also approached last week.

Troim said no bid had been made. "Not at all, on the contrary," he said.
SeaDrill already owns large minority positions in both these companies, 40% of Eastern and 33% of Apexindo, and could theoretically acquire the balance of both for about half a billion dollars, assuming the owners want to sell.

Interesting to see that the new management and old haven't quite meshed on their market message yet (unless this is all staged in order to keep people guessing). I'd like to hear what's happening behind closed doors in those corporate office this week. My suspicion is that Van Royen is telling the truth, but getting a big ahead of himself in that Fredriksen likes to hold his cards very close to his vest until he's ready to throw down a winning hand ... we'll see.

And SeaDrill, no surprise, also noted that it has exercised options on contracts for two newbuilding projects -- semisubmersibles, in this case, that will be built by Daewoo and SembCorp (SembCorp is another Singaporean shipbuilder and Keppel's biggest competitor, but there's plenty of business to go around for everyone). SeaDrill seems to want everything that floats, so I expect more acquisitions and more newbuilding orders to come out in good time