Earnings Preview: 3 Things to Look Out for in Keppel Corporation Limited and SembCorp Marine Ltd

Oil and gas stocks have had a tough time in the first nine months of 2016.

Take Keppel Corporation Limited (SGX: BN4), one of the world’s largest oil rig builders, for instance. For the first nine months of 2016, the company’s revenue has tumbled 38% year-on-year. Its net profit fared no better, falling by 42%.

Another major oil rig builder, Sembcorp Marine Ltd (SGX: S51), has taken a similar beating. Over the same period as Keppel Corp, Sembcorp Marine recorded just S$44 million in net profit, a far cry from the $386 million and $264 million it recorded in the first nine months of 2014 and 2015, respectively.

The next quarterly earnings report from the two companies will wrap up 2016 for them. Here’re three things investors might want to look out for.

Cash, cash, cash

Both Keppel Corporation and Sembcorp Marine have registered positive free cash flow in the third quarter of 2016. The former logged $560 million in free cash flow while the latter brought home $682 million.

As their businesses slow down, less cash is needed to support any new and ongoing projects. But, the influx of cash is a welcome sight, nonetheless.

Both Keppel Corporation and Sembcorp Marine have been hit by instances of customers either going bankrupt or being mired in dire financial straits. The most prominent case for both companies would be the Brazilian oil and gas outfit, Sete Brasil. The situation there remains unclear.

At the end of September 2016, Keppel Corporation had a net debt position of around $6.8 billion and a net gearing ratio of 0.57 times. Sembcorp Marine had a net debt position of $2.6 billion.

Investors may want to observe how the free cash flow and debt figures for both companies stack up in the final quarter of 2016.

The net orderbook

Sembcorp Marine ended 2015 with a net order book of $10.4 billion. At the end of 2016’s third quarter, this figure had receded to $8.4 billion. When we exclude orders from Sete Brasil, Sembcorp Marine’s net orderbook is actually down to just $5.2 billion.   

The situation is similar for Keppel Corporation. It ended 2015 with a net orderbook of $5.1 billion without Sete Brasil’s orders (the figure would be $9 billion otherwise). This figure had declined to $4.1 billion (to remove any doubt, this excludes Sete Brasil’s orders) by the end of 2016’s third quarter.

Any uptick in orders for Keppel Corporation and/or Sembcorp Marine might be a sign that their fortunes are turning around.

Cloudy skies ahead

The outlooks mentioned by both companies have been dour throughout much of 2016.

Although oil prices had recovered from their lows in early 2016 as the year came to an end (oil prices fell to less than US$30 per barrel early in 2016 but are around US$55 currently), both companies do not see an uptick in their fortunes anytime soon based on their latest third quarter outlook statements.

Both Keppel Corporation and Sembcorp Marine pointed toward an excess supply of drilling rigs as a problem. It might take time for the market to absorb the excess capacity before new orders can make their way to Keppel Corporation and Sembcorp Marine.

Investors may want to see if both companies have an updated outlook.

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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.