Keppel Corporation Limited’s Offshore and Marine Sales: Can it Hold Up?

Keppel Corporation Limited  (SGX: BN4) has had a forgettable 2014. From the start of last year through yesterday, the oil and gas giant’s shares are down over 20% with shrinking oil prices having played an obvious role in the malaise.

With the decline in the prices of both oil and Keppel Corp’s shares, here’s an interesting question: Can the sales of Keppel Corp actually hold up?

Oil prices, sales, and net orderbook

Keppel Corp’s exposure to the oil and gas industry is best represented by its Offshore and Marine segment.

Before we dive in, we should note that the business of Keppel Corp actually goes beyond the oil and gas industry alone. While the Offshore and Marine segment makes up a significant portion of Keppel Corp’s sales, there is another one-third of the company’s revenue which does not come from the segment.


Source: Keppel Corp’s Earnings Report

In looking at the Offshore and Marine business segment, we may want to focus on its revenue, profit, and net orderbook. The chart below summarizes the historical figures for the trio. 2015-01-26 Keppel Order Book

Source: Company Earnings Report, author’s calculations

First off, we can see that Keppel Corp’s net orderbook has actually grown over the last four years, more than doubling in that time. The recognition of the revenue has be patchy from quarter to quarter, but the level of outstanding orders from customers has been above $12 billion for the past 10 quarters.

In the last two quarters though, the net orderbook has started to decline a little, likely as a consequence of the malaise in oil prices. This shift was noted by Loh Chin Hua, Chief Executive Officer of Keppel Corp, in the company’s last earnings report:

  1. Oil companies are reviewing planned projects, and putting some projects on hold.
  2. 119 jackups and 53 deepwater rigs will enter the market over the next two years – the rate of absorption of this new supply of rigs is being closely watched.
  3. Dayrates (cost per day for operating a rig) has also fallen precipitously; the backdrop to this is that higher dayrates allow rig owners (Keppel Corp’s customers) to earn higher revenue and profits, all things equal.

Where does Keppel Corp stand?

In the last quarter (fourth quarter of 2014), Keppel Corp’s Offshore and Marine segment recorded $2.38 billion in sales, and had $12.5 billion in its net orderbook, which stretches into 2019. At this sales rate, the order book would only last a little over five quarters. It’s worth pointing out though that the quarterly revenue of the Offshore and Marine segment will likely not remain flat at S$2.38 billion for five quarters going forward.

CEO Loh also noted that:

“Our enviably strong orderbook, filled mainly by established customers, will keep us busy and cushion us for the next two years. It will also allow us to remain selective of projects that can translate into the best possible risk-adjusted returns for the Group.”

Foolish investors may also find comfort in the fact that profit from Keppel’s Offshore and Marine business was positive despite much lower revenue levels in late 2010.

Foolish takeaway

In any business observation, a historical view and understanding of risks might be helpful to the Foolish investor to gain context over the investment opportunity.

Beyond this, we have to note that the levels of borrowings at Keppel Corp has increased while free cash flow remains negative. All these will have to come into play when we are deciding whether or not the company gets a spot in our own stock portfolios.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.