Sembcorp Marine Ltd’s Latest Earnings: 3 Key Things to Know About the Oil and Gas Industry from Management

Oil rig builder Sembcorp Marine Ltd  (SGX: S51) reported its 2016 full year earnings last month.

For 2016, the company’s revenue was down 28.6% to $3.5 billion. On the other hand, it managed return to profitability in the year, recording $75 million in net income after posting a big loss in 2015. The rig builder also generated positive free cash flow in 2016, up from the negative free cash flow seen in the previous year.

Yet, challenges remain for the company. In Sembcorp Marine’s latest earnings report, its chief executive, Wong Weng Sun, gave his take on the state of the oil and gas industry.

1. Intense competition in a shrinking market

The oil and gas industry is experiencing challenges from a few directions. Wong explained in his opening speech:

“The fall in oil prices had resulted in upstream oil & gas capex reducing for a second consecutive year in 2016. Day rates and utilisation levels for existing rigs remained at cycle-low levels.

Competition intensified as players competed in a shrinking market for orders. With financial players holding or withdrawing their exposure to the sector, the resulting lack of financing posed further challenges for all players across the value chain.”

Some of the issues buffeting the oil and gas industry include low day rates in the presence of a shrinking market and intensifying competition. Suffice to say that the industry is not in great shape at the moment.

2. A glimmer of hope

On the other hand, Wong also noted an increase in oil prices that took place in the latter half of 2016. The rise followed a decision by OPEC (Organization of the Petroleum Exporting Countries) and major non-OPEC oil producers to cut their level of production:

“As the oil and gas industry struggled into its third year of a severe downturn, OPEC and major non-OPEC producers surprised markets in November 2016 with an announcement of their first agreement to cut production in eight years. This sent oil prices rebounding to above the US$50 per barrel range, from lows of below US$30 per barrel in early 2016.”

Higher oil prices could set the stage for a recovery in the industry, according to Wong.

3. The longer term view

All told, Wong is optimistic on the long-term viability of the oil and gas industry. He feels that oil prices will stabilise over the medium to long-term:

“Demand for energy resources is expected to continue to grow steadily. Coupled with the steady depletion of existing oil reserves, oil prices are projected to eventually stabilise at a range which can support the growth of offshore projects in the medium to longer term.”

Sembcorp Marine appears to have struck a more optimistic note in its latest earnings report as compared to the past few reports. However, its peer, Keppel Corporation Limited (SGX: BN4), thinks that higher oil prices are not the only condition needed for a recovery in business. You can catch Keppel Corporation’s view of the oil and gas industry here.

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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.