Have The Business Prospects Of Keppel Corporation Limited Improved By 20% Since November?

It has finally happened after a long and nervous wait. OPEC and other non-OPEC oil producers (such as Russia) have agreed to cut their production of crude oil over the weekend.

The announcement has sent oil prices surging to about US$55 per barrel, which is up significantly from the mid-US$40 level seen in November. Many oil and gas-related companies listed here in Singapore have also seen some major movements in their stock prices after the deal was revealed.

A good example is Keppel Corporation Limited (SGX: BN4), the poster child of the oil and gas sector in Singapore. The company has seen its share price rally by about 20% since the lows in November 2016. But, have the business prospects of Keppel Corporation improved by 20% over the past month just because oil prices have climbed?

Market commentators are predicting oil prices will move higher in the future. If that happens, it will be good news for the oil and gas industry’s upstream producers and service providers.

But, let’s take a closer look at the business of Keppel Corporation. It is a conglomerate and its Offshore & Marine business segment is the one that gives it exposure to the oil & gas industry. The segment, which focuses on building oil rigs and other speciality vessels for oil producers, has generally been the largest revenue contributor to Keppel Corporation in the last few years.

Oil producers would only order new rigs when they are able to find new plots to drill for oil economically. They have to make assumptions about their cost of production and whether they are able to extract the oil profitably. If they are confident in doing so, they would then order rigs from companies such as Keppel Corporation. Each rig might then take a few years to complete.

So, we can see that the ordering and delivery of an oil rig is a very long process and requires long-term planning on the part of all parties. It seems highly unlikely that oil producers would base their decisions to order rigs on the daily changes in oil prices. In fact, Keppel Corporation has mentioned before that demand for its products and services might not recover that quickly, even in the event that oil prices recover.

It is important for investors to know that even though companies such as Keppel Corporation is exposed to the oil and gas sector, it does not mean that its business prospects would change actively with short-term movements in oil prices.

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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 Stanley Lim doesn’t own shares in any companies mentioned.