6 Must-Read Quotes from Keppel Corporation Limited’s Management on its Offshore and Marine Business

Keppel Corporation Limited’s (SGX: BN4) Offshore and Marine business segment is mired in problems.

In the first nine months of this year, the Offshore and Marine (O&M) segment’s revenue tumbled 58% year-on-year. Net profit was no better, as it fell a hefty 69% over the same period.

During Keppel Corporation’s 2016 third quarter earnings presentation, management had touched on a number of topics related to its O&M segment.

Here are six quotes from management that investors might not want to miss.

The long and harsh winter continues

Loh Chin Hua, the chief executive of Keppel Corporation, had warned about a long winter for the oil and gas industry late last year. In August this year, when the company released its 2016 second quarter results, Loh said that Keppel Corporation has to be prepared for not only a long winter, but a harsh one as well.

There was no respite in the third quarter of 2016. Loh said:

“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.”

In short, higher oil prices alone will not bring new orders to Keppel Corporation’s doorstep. The industry remains oversupplied, a condition which might take time to sort out.

Looking to emerge stronger

Like the quarter before, Loh said during the third quarter earnings presenation that Keppel Corporation has been rightsizing its operations to adjust to the current environment. Despite the cost cutting drive, Loh highlighted Keppel Corporation’s aim, and that is to come out from the downturn stronger than before:

“Rightsizing of our Keppel O&M business will continue as we prepare for an extended period of weaker demand for new oil rigs.

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.”

Beyond oil and gas

In particular, Loh said that Keppel Corporation will be looking to use its O&M expertise in other markets. He said:

“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 short, Keppel Corporation’s management envisions its O&M business to be less tied to the oil and gas industry in the future. Beyond this, Loh also spent time talking about the liquified natural gas (LNG) market:

“We see a promising future for the LNG market over the long term.

The use of LNG as an alternative marine fuel is on the rise as a result of emissions reduction goals set by the International Maritime Organisation and the United Nations Climate Change Conference.

Keppel is well positioned to capture opportunities across the value chain in the growing gas market. We have secured orders for our first two dual-fuel tugs, which will be built to Keppel’s award-winning proprietary design.”

But in the meantime, deep cuts are necessary

In the meantime, Keppel Corporation has had to make difficult choices to keep its operations profitable. Loh added:

“For the first nine months of the year, Keppel O&M has reduced its direct workforce by close to 8,000 or around 26%.”

Keppel Corporation is also looking to cut its overheads as it rationalizes its cost structure. Loh noted that the company’s operating margin was 11.4% for the latest quarter and 12.5% for the first nine months of the year, despite the sizable decline in revenue.

A hopeful note

As mentioned before, Loh had said that it will be a long and harsh winter for Keppel Corporation’s O&M business. But Loh also added a hopeful note in the third quarter earnings presentation:

“The harsh winter in the O&M market will not last forever. We are not just cutting costs to survive the short term. We are taking advantage of the downturn to restructure Keppel O&M and make the company leaner, more competitive and stronger when Spring returns.”

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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 writer Chin Hui Leong doesn't own shares in any company mentioned.