About Keppel Corporation
Keppel Corporation (SGX: BN4) is operating and emphasized as a multi-business company that derives its revenue from four sources.
The four sources of income are from Offshore and marine, Property, Infrastructure and investments starting from the one with the most net profit to the one with the least.
Their strategic direction has always been staying focused and diversifying themselves on the multi-business model while seeking opportunities nearby.
This article aims to guide investors on whether to hold, buy or sell Keppel based on the current low oil price climate.
When and Why I Bought Keppel Corporation
I first bought Keppel Corporation(SGX: BN4) stock back in 22nd February 2015 at an average price of S$8.74.
My main thesis in buying it revolves around the fact that their competitive advantage lies in the multi-business model and the fact that I know their property sector could cushion the fall in net profits in the worst case scenario of oil price falling lower.
So I wanted to take advantage of the low valuation of Keppel back then to earn potential capital appreciation and a cool 5% dividend (The oil price was around $60 per barrel and I expected it to fall even more to $50 but at the current $30 level, I have to be honest I was caught by surprise).
I was right at the fact that Keppel has that competitive advantage and that the property sector will cushion their fall – I was glad I did not buy Sembcorp Marine back then despite the equally cheap valuation- mainly because they are too concentrated on their O&M sector.
Will Oil Price Recover
First, this all started with the drop in oil price for the past year -simply due to an oversupply in the market- not helping with Iran sanction lifted and flooding the market with more oil. The current situation is really serious, oil price this low has not been seen in decades.
Although the near-term demand outlook remains weak due to china’s slowdown and a poor global economic environment. Longer term demand for oil and gas remains robust underpinned by rising demand in Asia pacific and even Africa.
Hence, I believe that oil recovery is a when and not an if- this is because the current oil price of below $40 per barrel is not viable for the long term. Now is the time of the survival of the fittest- whereby cash flows and balance sheet management is critical.
Why I Believe Keppel Corporation is Hold-able
Earnings from the property segment will help them last through the winter
2015 was a critical year for Keppel because this year they changed CEO to Mr.Loh Chin Hua which has a lot of experience in property and at the same time they took Keppel Land to private. It is also the year which the oil price came crashing down due to stagnating demand and an oversupply of oil. There has to be a reason on why the Keppel Board of Directors chose the current CEO who is more experienced in property as compared to offshore and marine industry sector- and I think the reason is because Keppel meant it when they said they are focusing on their multi-business model so that the company would not rely so much on the cyclical nature of the oil price in the future.
Some of us may be concerned about whether the CEO lack of experience in the O&M sector is bad for the group; I do not think that is the case – because, under the Keppel group, there are a lot of O&M managers that has over 20-30 years of experience in the O&M industry- they will take care of the O&M segment while the CEO can focus on expanding the property segment.
As of FY2015, the property segment net profits are already higher at S$701 m as compared to S$481m for O&M. We can see that the multi-business model of Keppel is paying off in the current economic downturn- as compared to Sembcorp Marine which is much more focused on O&M.
They have a good quality management
I believe that Keppel has a really good quality management taking care of the company. This can be seen from history whereby they have been able to maneuver themselves out of a crisis.
For example, the year 2008 was a tough year for Keppel during the low oil price environment with lack of orders from customers for building new oil rigs- however it proved to be an opportunity for Keppel to service all their existing clientele. This is good for Keppel because for the past decade, Keppel has built more than half of the world’s new jack-up rigs and there have to be some quality clients that see the long term investment value in repairing or upgrading their existing oil rigs- oil price will not stay low at the $20-$35 range forever – it is not sustainable.
After 2008, within a one year period in 2009, the global economy began to stabilize due to the measures being put in place by governments all over the world. This is to prevent a great depression style meltdown. Despite the fact that the oil price dropped to US$35 per barrel in 2009 first quarter, the oil recovered from US$40 per barrel to around US$70 per barrel by mid-2009.
The reason the management is able to maneuver well through a crisis is also because of their multi-business model. For example, just recently in January 2016, Keppel said that they will consolidate its interests in four asset management businesses under one subsidiary, calling the move a “major restructuring exercise to grow the contribution from its investment division”. The consolidation would include the managers of Keppel Infrastructure Trust, Keppel DC Reit, Keppel Reit and Alpha Investment Partners. The four businesses currently manage S$26 billion of assets and contributed S$60 million of profits in 2015. I feel that the main reason they are doing this is because, in the long run, they would be planning to provide and charge other companies on their expertise in capital management- in order to further grow income from the investing segment- albeit for now it is the lowest contributor to earnings as compared to the other 3 segments.
Current oil price is not sustainable in the long run
“The long-term fundamental of oil business has not changed despite the fall in the oil price. The world’s growing population will demand more energy while major producing oil fields are declining rapidly. As conventional reserves are exhausted, oil companies will need to push the limits of technology to gain access to resources in deeper water and harsher frontiers, which today’s low oil prices do not effectively support. The oil and gas sector will inevitably move towards a new equilibrium, driven by demand and supply dynamics, as experienced in previous cycles. “- Keppel Corporation CEO, Mr. Loh Chin Hua
Being as objective as I could, I think the oil price will eventually recover to a price that will ensure sustainability of the production of oil in the long run- most probably will not reach to a previous high of $100- but reaching$50-$70 is highly probable.
When the oil price recovers, Keppel stock will too- provided they are going to survive this long and cold winter, which I think based on their multi-business model, they will.
Disclosure: I am long on Keppel Corporation(SGX: BN4). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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