A potential deal would bring together one of the world's largest offshore oil rig builders with smaller rival Sembcorp after the businesses were whiplashed by years of oversupply in the sector, sustained weakness in oil prices and a drop in new orders.
Both companies own a network of shipyards in Singapore and overseas, including in Brazil, and employ thousands of workers.
Sembcorp has a market value of S$2.4 billion (US$1.8 billion), while Keppel, whose businesses include property and infrastructure, is valued at S$9.3 billion.
Both companies are holding separate news conferences later on Thursday.
The sources said boards of both companies are meeting to begin discussions that could take many months and ultimately result in Keppel Corp. hiving off its O&M business and combining it with Sembcorp Marine.
Markets have been expecting a much-needed consolidation in the rig-building sector as companies in the shipbuilding and marine sectors in markets such as South Korea and China have already joined forces amid a weak sector outlook.
Keppel's shares have lost around 15% over the past 12 months, while Sembcorp has tumbled 40%.
Last year, Temasek scrapped a US$3 billion move to raise its stake in Keppel and take control, following Keppel's poor performance.
Then this year, Keppel said it was exploring options for its O&M business, as part of the group's 10-year strategy to refocus its portfolio on energy and environment, urban development, connectivity and asset management.
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