3 Vivid Quotes on the State of the Oil & Gas Industry from Keppel Corporation Limited

Keppel Corporation Limited ’s (SGX: BN4) Offshore and Marine business segment had a tough year in 2016.

Revenue there tanked by 54% from $6.24 billion in 2015 to $2.85 billion in 2016. Furthermore, net profit from the segment also dwindled to $29 million, down from $482 million in 2015. The fall in profit was largely due to a charge of $336 million for the right-sizing of the segment and for impairments to investments and works-in-progress.

In Keppel Corporation’s fourth quarter earnings presentation, management delved deep into the state of the oil & gas industry. Here are three quotes I picked out that vividly describe the situation.

It’s not business-as-usual

Loh Chin Hua, Keppel Corporation’s chief executive, had warned about a long winter for the oil and gas industry in late 2015. Then, in Keppel Corporation’s 2016 second quarter earnings presentation, Loh said that the company has to be prepared for not only a long winter, but a harsh one as well.

There was no respite for the company in the last quarter of 2016. Loh was candid in his assessment of the industry:

“We are going through a very long and harsh winter so it is not business-as-usual.

The steps that we are taking to rightsize Keppel Offshore & Marine (Keppel O&M) to make it stronger and more efficient for the future necessitates that we take some fairly strong actions in terms of capacity, which then results in this. So a lot of the impairments are related to the rightsizing exercise.”

Cuts are painful, but necessary

The impairments and right-sizing at the Offshore & Marine segment was necessary to adjust its capacity to fit with current realities. Loh shared his own thoughts on the matter:

“No one likes impairments but if it is necessary, it is right that we do that.

You must look back at how Keppel O&M has run its business through both the upcycle and the downcycle. We have always been very judicious in the use of capital, many of our yards are not new yards. Given what we see today, if we had invested even more in our yards during the good years, the impairments might be worse.”

The statement above highlights the cyclical nature of the oil & gas industry. As a player in the space, Keppel Corporation has to be mindful of its capital investments and avoid over-investing in good times and under-investing in bad times.

Higher oil prices are good, but not enough

In his opening statement, Loh noted that oil prices had doubled over the past year. This is good news for the industry. But, Loh also said that that higher oil prices is not the only condition for a recovery:

“As I alluded to in my opening remarks, I think the rebound in oil prices sets the necessary stage for the eventual recovery of the offshore sector but it is not the only condition.

We still need to see improvements in terms of the utilisation rate of the existing fleets as well as a period of time for the excess rigs, new builds to be absorbed. More importantly, the rebound in oil prices will lead to more substantial increase in E&P [exploration and production] spending.

So it will help, but it is not a direct correlation”

As Loh noted, higher oil prices sets the stage for improvements, but the industry still needs to work through excess capacity before new orders can come rolling in. Interestingly, Loh also pointed out that a recovery at Keppel Corporation is not directly correlated to oil prices, a point that my Foolish colleague Chong Ser Jing has made before.

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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.