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Keppel Corporation Limited’s 2016 Annual Report: 2 Key Things Investors Should Know About the Oil and Gas Industry

Keppel Corporation Limited’s (SGX: BN4) offshore & marine (O&M) segment has been decimated by prolonged low oil prices.

Crude oil brent prices was over US$110 per barrel in 2014, but has since declined sharply to around US$55 per barrel today. In fact, oil price has been below the US$60 per barrel mark since the start of 2015 till today.

Source: Keppel Corporation’s investor presentation  

Keppel Corporation chief executive Loh Chin Hua has summed up the dire situation as a “long and harsh” winter. In its 2016 annual report, Loh shared his thoughts around the current state of the industry.

1. Higher oil prices will not be enough  

Oil prices went below the US$40 per barrel mark in late 2015. It has since recovered to around US$55 per barrel today. The rebound in oil prices is a welcome sight, but it is not sufficient, according to Loh:

“Oil price is only one of several factors determining when rig orders will return.

While the rebound is positive for the offshore sector, it is not sufficient on its own to trigger an immediate improvement in the operating environment.”   

2. There is more than one challenge

Exploration and production expenditure remains weak, said Loh. He believes that oil companies are still hesitant to increase capital expenditure, preferring to shore up their balance sheet:

“Exploration and production expenditures need to increase in order for the market to improve.

And it may take a while before we see a significant increase in capex as oil companies and fleet operators continue focusing on capital discipline and improving their balance sheets.”

The situation leads to lower revenue for Keppel Corporation. Furthermore, Loh also noted that rig utilisation is low:  

“Meanwhile, the utilisation of existing rigs remains weak, and the offshore market will take time to absorb an oversupply of new builds.”

The two points above signify the deep challenges within the industry. In our next article, we will look at how Keppel Corporation plans to ride this out.

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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.