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Keppel Corporation Limited: Lower Oil Prices to Linger and 8 Other Things Investors Should Know

Keppel Corporation Limited (SGX: BN4) is one of the cool companies in Singapore which shares webcasts of their quarterly earnings releases (the link for Keppel Corp is here).

As a brief introduction, Keppel Corp has four main business units: Offshore and Marine; Infrastructure; Property; and Investments. These business units houses various subsidiaries, some of which include Keppel Telecommunications & Transport Ltd  (SGX: K11)Keppel Infrastructure Trust (SGX: A7RU), and property developer and investor Keppel Land Ltd (SGX: K17). The former two fall under Keppel Corp’s Infrastructure umbrella. Meanwhile, Keppel Corp now owns more than 99% of Keppel Land following a privatization exercise earlier this year.

You can read more about Keppel Corp in here and here.

Below are eight useful things about Keppel Corp I had learnt from reading the transcript of its latest second-quarter earnings webcast:

  1. In his opening address, Chief Executive Officer Loh Chin Hua shared his view on the global economic conditions in China, the US, and the European Union. He then moved on to the price of oil, saying that “lower oil prices for a sustained period is a reality that the oil and gas industry needs to grapple with.” In replying to a question from an analyst, Loh commented that Keppel Corp’s yards will be busy for the next two years. Loh also said that this period is good for Keppel Corp to consolidate and improve on cost efficiencies. As of 30 June 2015, Keppel Corp’s net orderbook for its Offshore & Marine segment stood at $11 billion.
  2. In another highlight, Loh pointed out that the ability of Keppel Corp to sustain its performance and dividend payouts are in part due to what Keppel Corp refers to as Revaluations, Major Impairments and Divestments (in short, RIDs). He also said that RIDs have historically made up about 20% of the Group’s annual earnings in each year. Foolish investors may want to note that Keppel Corp’s free cash flow has been negative for the most part over the past five years even as its level of borrowings has increased substantially over the same period.
  3. Responding to a question on Keppel Corp’s ongoing Offshore & Marine projects with Sete Brasil, Loh commented that Keppel Corp has not received any payments from said customer since November 2014. Keppel Corp is in active discussions with its customer and the end user (Petrobras) on how to proceed with the projects. On Keppel Corp’s end, it has slowed down on construction and will wait for its customer to complete its debt restructuring. Chow Yew Yuen, the chief executive of Keppel Offshore & Marine, added that the three drilling semisubmersibles for the Sete project are currently 90%, 63%, and 36% completed.
  4. As part of the earnings presentation, Keppel Corp also shared that $170 million – or 22% of the conglomerate’s first-half earnings – were deemed to be recurring. When asked about the company’s future target for recurring income contribution, Loh said that there is an internal target, but it will depend on market conditions. Keppel Corp will not be sharing the target figure.
  5. When challenged on his statement that “the yards are busy,” Loh said that the Offshore and Marine division is planning to deliver 15 rigs this year, followed by eight rigs next year, and six rigs the year after that. Repairs may pick up some of the slack; the repair business will come with lower revenue but a better profit margin.
  6. Keppel Corp will be looking at right-sizing itself. For the second quarter of 2015, revenue at the Offshore and Marine division fell 23% year on year while its pre-tax profit fell 36%.
  7. Loh added that the right-sizing will be done on the basis of “value engineering” and will not be about the act of just cutting costs across the board. Keppel Corp is looking to improve productivity as well. Chow added that the crisis presents new opportunities as equipment and material costs have come down.
  8. On the Infrastructure business, the unit’s chief executive, Ong Tiong Guan, gave a brief outlook. He expects margins for the division to be challenged over the next few quarters, including 2016.
  9. On the other hand, Keppel Land’s chief executive Ang Gee Wee had nicer news to share on the business unit with him commenting on his positivity regarding the Chinese Residential market for the coming one to two years. Ang also cited the lifting of property cooling measures by the Chinese government and the interest rate cut as potential tailwinds. Other big trends may be “the phenomenon of urbanization and growing middle income.”

Foolish takeaway

If we are looking to own a company’s shares for the long-term, we have to keep up with developments in the firm.

The access to management teams via webcasts gives the Foolish investor a fair chance to judge whether they’d like to be invested alongside those teams. It also helps us put together a more complete thesis around a company and keep up with developments in its industry.

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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.