Keppel Corporation Limited (SGX: BN4) does a substantial amount of business building oil rigs, drillships, and the likes. Because of that, its shares sure has felt the impact of the falling price of oil. Since peaking at mid-2014, crude oil has seen its price fall by nearly half or more (depending on which price measure you use). As for Keppel Corporation, it has seen its shares lose 18% of their value since the start of June 2014. But, is this fall really justified? Is the conglomerate really that dependent on the price of oil? Diversification We need to understand that…
Keppel Corporation Limited (SGX: BN4) does a substantial amount of business building oil rigs, drillships, and the likes. Because of that, its shares sure has felt the impact of the falling price of oil.
Since peaking at mid-2014, crude oil has seen its price fall by nearly half or more (depending on which price measure you use). As for Keppel Corporation, it has seen its shares lose 18% of their value since the start of June 2014.
But, is this fall really justified? Is the conglomerate really that dependent on the price of oil?
We need to understand that Keppel Corp is actually a huge conglomerate with multiple businesses.
On the surface, the company still seems very much reliant on its offshore and marine business – where the company builds rigs and drillships – as it is the firm’s largest revenue and profit contributor. In 2014, the segment accounted for nearly two-thirds of Keppel Corp’s annual revenue of US$13.28 billion and 55% of total profit of S$1.88 billion.
However, there have been some new developments in the company which might help shift its reliance on the oil and gas sector.
Burgeoning infrastructure growth
The first development concerns Keppel Corp’s infrastructure business. As part of its diverse business activities, the company also has infrastructure plays which house data centres, power plants, and logistic hubs, amongst others.
Part of Keppel Corp’s activities in those spaces actually fall under the purview of its majority-owned subsidiary, the logistics outfit Keppel Telecom & Transport Ltd (SGX: K11). The latter used to be heavily involved with data-centres as well, but had spun-off most of its data-centre assets into Keppel DC REIT (SGX: AJBU) late last year.
The spin-off actually enabled Keppel Corp to raise some capital to expand the data-centre segment of its business aggressively.
With the growth in demand for cloud computing, the need for data centres would grow alongside. Furthermore, as the breadth and depth of e-commerce grows, the need for faster and more reliable deliveries would help push the demand for more and more logistics services. Thus, there’s the possibility that Keppel Corp’s logistics and data centre businesses may be much bigger in the future.
However, if the privatisation does go through, contribution from the property segment might move up to around 38.5% based on the 2014 figures. This will shift the exposure of Keppel Corp away from the oil and gas sector in a significant manner.
Keppel Land had also been busy over the past few months with certain asset sales (such as the sale of its one-third stake in Marina Bay Financial Centre Tower 3 to Keppel REIT (SGX: K71U)), raising S$1 billion in the process. That’s a sizeable amount of capital which can be used to grow the property business
The fall in oil prices has created strong headwinds for Keppel Corp’s oil & gas-related business, but it seems like the company has already been preparing to shift exposure away from the oil and gas sector by growing its other business segments.
It might take a few years (depending on how things pan out with say the likes of Keppel Land’s privatisation) before we can see some meaningful shift in the mix of revenue and profits from Keppel Corp’s different business segments. But, the key takeaway here is that the company has already started this process.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Keppel Corporation Limited.