The world's leading offshore oil rig developer, Singapore based Keppel Corp-- which has significant representation in iShares MSCI Singapore Index Fund (EWS)-- has entered into a $600 million deal with the Norway based Golar LNG (GLNG) to convert up to three LNG vessels into Floating LNG (FLNG) vessels. This new and innovative FLNG vessel looks to threaten the dominance of the leading LNG producers such as Shell (RDS.A), ExxonMobil (XOM) and BP (BP) as the enormous capital investment requirements have generally kept the smaller players at bay. Not only is Golar aiming to produce LNG at minimum capital expenditure its plant will be superior to Shell's Prelude floating LNG project. Golar's vessels that Keppel is converting can come near the shore while the fuel will be supplied through pipelines. This makes the LNG production capabilities of the platforms much more flexible. The first of such vessels, with an annual production capacity of 2 million metric tons, will be ready within three years.
More recently, on 9th November, Keppel revealed that its subsidiaries have secured further contracts totaling $130.8 million for oil and gas projects in the Philippines and Netherlands.
For the first nine months of the fiscal year 2012, Keppel recorded a 51% increase in revenues to $8.9 billion and a 47% increase in profits to $1.3 billion which translates into an EPS of $0.74. Keppel is a conglomerate and its business is divided into four segments:
1. Offshore & Marine -- rig construction, maintenance and other offshore projects
2. Property -- which manages all of Keppel's real estate holdings
3. Infrastructure -- that deals with power generation, water treatment and waste management
Most of Keppel's earnings come from offshore projects.
However, the increase in net income for the quarter came from the high returns of the Property and Investments divisions while the net income of Offshore & Marine and Infrastructure fell by 11% and 19.3% respectively. Despite showing an increase in profits through the first nine months of 2012 year-over-year, income for the third quarter fell by 15% to $332 million. The drop was mainly due to the decrease in margins caused by increasing competition as the oversupply in the shipbuilding industry is attracting yard developers into offshore oil and gas.
However, despite the drop in the quarter, the business secured $5.97 billion of new contracts from Brazil, Kazakhstan and Singapore thus taking the total value of projects in pipeline to $10.7 billion for the next seven years. The figure does not include the recent deals with GLNG or the new oil and gas projects.
On the other hand, Keppel's main rival SembCorp Marine Ltd, which also has a significant representation in EWS (1.80%) and is the second largest holding of the Guggenheim Shipping ETF (SEA) (6.93%) reported an even more significant drop in quarterly revenues and profits of 31.5% and 48% to $729 million and $94.4 million respectively. Unlike Keppel, SembCorp is also engaged in offshore exploration and production activities in addition to rig building and therefore it is more exposed to oil price fluctuations. SembCorp has slightly fewer projects of $9.89 billion in its next seven year pipeline.
These results are not surprising given the slowdown in global growth and the pressure that oil prices have been under recently. Singapore's GDP has been contracting now for the past two quarters which puts it squarely in the technical definition of a recession as firms within the country struggle to maintain trade volume and price.
The drop in profits by the world's second biggest rig builder has been attributed to the same reasons as Keppel's; pressure on prices is reducing the margins but the alarming point here is that this change could be for long haul. SembCorp has reduced its long-term margins forecasts from 14%-15% to 10%-13% but Keppel hasn't given any such guidance.
Both firms have plenty of projects in their pipelines and the long-term rise in oil prices in the coming year will have to result in more orders for offshore rigs as the search for energy moves farther off of dry land. Sembcorp is expected to record a better fourth quarter as it will realize the earnings from more projects as opposed to the recent filings which included only one jack-up rig. But with 50% global market share for jackup rigs and 33% for semi-submersible rigs coupled with an even larger number of projects in pipeline, Keppel still remains the dominant player with a stable future. Keppel is currently trading below a P/E of 8 and recent price weakness has pushed the yield up to around 4.3% and while the global economy feels like it wants to fall off a cliff there can be no denying the need to explore for more oil-- marginal demand is only going to increase as the Asian story unfolds. The situation in Singaporean real estate is likely to be unsustainable and Keppel has been steadily moving its successful property investments off to its REIT as well as looking abroad with significant properties in Sri Lanka and Perth, Australia.