Keppel Corporation Limited And SembCorp Marine Ltd Agree: There’d Be A Long Winter for the Oil & Gas Industry

Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) are two oil rig builders who have found themselves in the same boat.

Low oil prices have hit both companies hard. In the first-quarter of 2016, Sembcorp Marine saw its profit sliced nearly in half. The picture wasn’t much better at Keppel Corporation. The company saw its profit fall over 40% over the same period. Both companies are expecting a tough year ahead as well.

The current predicament  

In Sembcorp Marine’s latest earnings report, its chief executive Wong Weng Sun had the following thoughts to share:

“Hopes of market equilibrium for global oil demand and supply have been pushed out further in the horizon as the April OPEC [Organization of Petroleum Exporting Countries] and non-OPEC producers meeting in Doha failed to reach an agreement for a production freeze. The recent oil price rally appears to be fizzling out and Sembcorp Marine maintains its cautious outlook in the midst of such continued volatility and uncertainty…

…Sembcorp Marine believes this down-cycle is likely to be more protracted than in previous cycles.”

Loh Chin Hua, Keppel Corporation’s chief executive, expressed the same sentiment in the company’s analyst briefing for its 2016 first-quarter earnings:

“This is an ongoing process in terms of both the OPEC and non-OPEC producers to try to come to terms with the market today. But in the short run, we believe that oil prices could remain volatile. Yesterday’s failure to reach an agreement will contribute to that volatility.

But I think fundamentally, we believe that the outlook for the offshore side will remain quite challenging for the foreseeable future.”

Based on the comments of both Loh and Wong, it would be reasonable to expect business conditions for Keppel Corporation and Sembcorp Marine to continue to be challenging for the foreseeable future.

The road ahead

The potential for a prolonged downturn puts the duo’s balance sheets into the spotlight. Loh also said:

“Amidst the headwinds, we are keeping a watchful eye on our gearing and cash flows, exercising financial discipline to maintain an institutional quality balance sheet.”

This focus on the balance sheet would be important. As of 31 March 2016, Keppel Corporation had $1.64 billion in cash and cash equivalents and total borrowings of $8.44 billion. Chan Hon Chew, the company’s chief financial officer, added:

“At this point in time, our gearing [is] at 56%. We still have quite good head room although we do not have a gearing target. But it suffices to say that we want to maintain an institutional quality balance sheet which means we do not expect our gearing to exceed 100%.”

Meanwhile, Sembcorp Marine’s Wong also talked about the need to maintain a healthy financial position. Sembcorp Marine had $955.3 million in cash and equivalents and $3.9 billion in borrowings as of 31 March 2016. Wong said:

“The Group will continue to actively manage its balance sheet to maintain a healthy financial position. We believe our current gearing level is manageable and we expect it to improve in the course of the year.”

In sum, both Sembcorp Marine and Keppel Corporation appear to be hunkering down for a long winter. Investors might want to keep a close eye on the duo’s balance sheet and ability to generate cash flow. To be sure, Loh maintains his view that conditions will eventually improve:

“In the long term, we believe that the oil price at today’s level is not sustainable. So, we believed that oil prices in the long term will move to a higher level that is more sustainable.”

We’ll have to see what the future brings.

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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.