Keppel Corporation Limited’s Offshore & Marine Division: The Past, Present, and Future

Shares of Keppel Corporation Limited (SGX: BN4) have been taken to the woodshed over the past two years with their price falling by 44%.

Keppel Corporation’s largest business division, Offshore & Marine (O&M), is behind much of the suffering that the conglomerate is going through. In a recent earnings briefing for the company’s 2016 third-quarter results, Keppel Corporation chief executive Loh Chin Hua talked about the current situation at the troubled segment and what it has planned for the future.

The past

The O&M division is very important for Keppel Corp. But, its contribution to the bottom-line had started to wane in 2015 and this is shown in the graph below:

Source: Keppel Corporation’s 2015 annual report

Loh acknowledged this development in his opening remarks in the 2016 third-quarter:

“Other divisions in the Keppel Group continue to bolster our earnings, with our Property business now the largest contributor, Infrastructure providing steady recurring income, and our data centre and asset management businesses serving as new areas of growth.”

The present

Oil prices have fallen hard over the past two years. But lately, there has been some better news on that front. This is what Loh said:

“The big news for the Oil & Gas sector during the quarter was OPEC’s announced deal to cut production. Although still scant on details, the news was welcomed by the oil market and we have seen oil recover to above US$50 per barrel.”

Unfortunately, higher oil prices does not immediately translate to more business for Keppel Corporation. Loh described the industry headwinds:

“Despite the gradual recovery in oil price, demand in the offshore market is expected to remain tepid. Oversupply remains a key concern in the offshore market, worsened by the overhang of rigs still under construction. With priority given to strengthening their balance sheets, the oil majors are expected to continue to hold back on offshore exploration expenditure.”

At the moment, Keppel Corporation is focused on cutting costs at the O&M division. Loh said that the company’s O&M business will be “rightsized” to cope with an extended period of weaker demand.

The future

But, Loh said that rightsizing is not just about removing costs alone. He made it clear that Keppel Corporation’s goal is to emerge stronger from this ordeal:

“We are not just cutting costs and surviving the downturn in the offshore industry, but are also investing prudently in new capabilities and exploring new markets and opportunities. Our aim, as always, is to emerge from this downturn stronger.”

Furthermore, in a hint on what’s to come, Loh said this:

“We are looking at re-purposing the technology that we have developed in the offshore industry for other uses such as floating power plants and floating desalination plants. We expect that our O&M business will be increasingly diversified beyond just oil and gas.”

In the quote just above, Loh gave some examples on how the O&M division may evolve in the future to move beyond the oil and gas industry. We will have to wait to see if Keppel Corporation’s O&M division is really able to gain traction in new areas.

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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.