Keppel Corporation Limited and Sembcorp Marine Ltd Agree: Oil & Gas Industry Recovery Will Take Some Time

Oil rig builders Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) are competitors. But the duo are also in the same boat, in the sense that they are enduring a tough operating environment.

Low oil prices have hit both companies hard. In the first quarter of 2017, Sembcorp Marine saw its profit fall by almost 29%. The picture wasn’t better at Keppel Corporation; the company’s offshore and marine business had no profit to show of in the same quarter.

And, both companies are also not expecting any improvement in their business any time soon.

Ok, what?  

In Sembcorp Marine’s latest earnings report, Wong Weng Sun, the company’s chief executive officer, shared his thoughts on the oil and gas industry:

“The offshore and marine industry continues to remain challenging.

The November 2016 OPEC agreement to reduce oil output has led to oil prices rebounding to the current US$50 per barrel range. We are hopeful that this trend will continue with oil prices sustaining at a range that supports offshore exploration and development investments by oil and gas companies.”

In effect, Sembcorp Marine is hoping that a price of level of US$50 per barrel for oil can be sustained to make it feasible for offshore exploration activity to happen. However, that is not the only thing that Sembcorp Marine has to deal with. Wong added:

“The pace of recovery in the oil and gas sector remains uncertain, and will continue to be impacted by the existing rigs supply overhang.”

Loh Chin Hua, Keppel Corporation’s chief executive officer, shares the same sentiment. In Keppel Corporation’s 2017 first quarter earnings presentation, he said:

“As we had cautioned at the Full Year 2016 results announcement in January, despite the increased optimism in the market following the rebound in oil prices, the offshore business continues to face very challenging conditions. This is due to, among other factors, the oversupply of rigs and support vessels. It will take some time before the industry fully recovers.”

In short, a recovery of oil prices to the level of over US$50 per barrel earlier this year has not translated into more business for Keppel Corporation and Sembcorp Marine.

Furthermore, Loh believes that it could take time for the industry to recover. Both Wong and Loh also pointed out that the market continues to be saturated with oil rigs that are operational and under construction. As it stands, both companies will need to hunker down for what could possibly be a long and harsh winter.

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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.