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Keppel Corporation Limited and SembCorp Marine Ltd Agree: Oil Prices Are Up, But Business Is Not

Keppel Corporation Limited  (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) are competitors.

But lately, the duo have found themselves in the same boat, experiencing choppy waters. Low oil prices have hit both companies hard. In the third-quarter of 2016, Sembcorp Marine made a loss. The picture wasn’t better at Keppel Corporation in the same quarter; it saw its offshore & marine segment’s revenue drop by 60%.

An agreement for both

In Sembcorp Marine’s latest earnings briefing, the company’s chief executive, Wong Weng Sun, shared his thoughts on the oil and gas industry:

“With OPEC’s announcement late last month of an agreement for modest oil output cuts, oil prices have rebounded from multi-year lows of below US$30 per barrel earlier this year, to above the US$50 per barrel range presently.”

Loh Chin Hua, Keppel Corporation’s chief executive, appears to agree with Wong’s assessment. He said the following in Keppel Corporation’s latest earnings presentation:

“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.”

On the surface, it appears that Sembcorp Marine and Keppel Corporation have finally received good news in the form of higher oil prices. But, that’s not really the case, according to both Wong and Loh.

The bad underneath the good

Wong also said this in his opening address during Sembcorp Marine’s latest earnings briefing:

“However, with reduction of offshore exploration and production capex projected to continue into 2017, the demand outlook for offshore exploration and production activities is likely to remain weak in the foreseeable future, especially given the existing excess supply of drilling rigs, and many yet-to-be delivered new-build rigs awaiting customer charters.

This has contributed to the increasing financial stress on companies across the entire upstream exploration and production value chain.”

Loh shared a similar assessment on the oil and gas industry during Keppel Corporation’s earnings presentation:

“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.”

So, based on Wong and Loh’s comments, higher oil prices does not translate immediately to more business for both Sembcorp Marine and Keppel Corporation.

Both chief executives had pointed out that the market continues to be saturated with oil rigs and the overhang of rigs under construction. As it stands, the two companies are expecting a tough year ahead.

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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.