Marine engineering and real estate development conglomerate Keppel Corporation Limited (SGX: BN4) has had its share of troubles in recent years. Earlier in the year, one of its major customers, Sete Brasil, filed for bankruptcy – the mess looks set to drag on. Meanwhile, the oil & gas industry continues to be mired in low oil prices – the price of oil is around US$45 per barrel today, a far cry from the level of over US$100 that was seen in the middle of 2014. Keppel Corp released its second-quarter earnings just last week. In the materials…
Marine engineering and real estate development conglomerate Keppel Corporation Limited (SGX: BN4) has had its share of troubles in recent years.
Earlier in the year, one of its major customers, Sete Brasil, filed for bankruptcy – the mess looks set to drag on. Meanwhile, the oil & gas industry continues to be mired in low oil prices – the price of oil is around US$45 per barrel today, a far cry from the level of over US$100 that was seen in the middle of 2014.
Keppel Corp released its second-quarter earnings just last week. In the materials was a transcript of the company’s opening address on its second-quarter results. Parts of the address had touched on the topics of Sete Brasil and low oil prices – here’re some snippets which may interest investors.
A long, harsh winter
Loh Chin Hua, Keppel Corp’s chief executive, provided his view on the future of the oil & gas industry:
“Although oil price has rebounded from below US$30/bbl in January to around US$47/bbl, the offshore and marine sector continues to face serious challenges. Given the oversupply in the rig market and falling day rates, we do not expect demand for drilling rigs to return soon.
Our traditional customers, the offshore drillers, need time to repair their balance sheets. Meanwhile, oil majors continue to conserve cash for dividends and potential M&As, rather than spend on E&P [exploration and production].
“The industry’s capex [capital expenditure] cycle will take time to stabilise and recover, and we must be prepared for not only a long winter, but a harsh one. Eventually, E&P capex in the industry will return when oil majors have to arrest falling production and replenish their declining reserves to meet the world’s continued demand for fossil fuels.”
Loh did not mince his words here. He indicated that an improvement in the price of oil does not mean an immediate upturn in Keppel Corp’s business. It will take time for higher oil prices to translate into new orders for the conglomerate’s marine engineering arm.
In short, Loh said that it will be a long and harsh winter for the industry.
On Sete Brasil
By the fourth-quarter of 2015, Keppel Corp had received US$1.3 billion in payment from Sete Brasil. It had also stopped all Sete Brasil-related work at the end of 2015. Keppel Corp also took a S$230 million provision for Sete Brasil projects for the whole of 2015 (the provision was made in the fourth-quarter).
As I had mentioned, Sete Brasil had filed for bankruptcy protection earlier this year (that would be January 2016). On 26 April 2016, Keppel Corp gave a short update on the Sete Brasil situation: The conglomerate reiterated that its original provision of S$230 million is sufficient.
Here is Loh with the latest update on Sete Brasil in Keppel Corp’s 2016 second-quarter earnings opening address:
“We have stopped work on the semi-submersibles for Sete Brasil since the end of last year. Sete Brasil has been working with a financial advisor on its restructuring plan and has filed for judicial recovery.
While we wait for more clarity on Sete’s plans, we believe that the provision of S$230 million made last year remains appropriate and adequate. We made the provision on the assumption that Sete may not continue its business as before.
Now that Sete has filed for judicial recovery, we have excluded Sete’s projects from our net orderbook. The contracts remain legally valid, and we will continue to work with Sete towards achieving a win-win outcome.”
As my Foolish colleague Esjay noted recently, Keppel Corp has excluded Sete Brasil’s projects from its orderbook. This resulted in the conglomerate’s orderbook falling from S$11 billion in the second-quarter of 2015 down to just S$4.3 billion currently. The orderbook represents part of Keppel Corp’s future revenue, so investors may want to watch for developments in this area.
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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.