Weekend Comment Jul 22: Keppel on top of its game

KEPPEL CORP HAS once again asserted its leadership in building some of the world’s most sought-after drilling rigs. Despite lower contributions from its property arm, its second largest profit driver, the group managed to report higher 2Q2011 earnings and set a record for new orders.

Net profit for the quarter ended June rose 9.3% on year to $384.9 million. On a q-o-q basis, growth was even stronger, at 23.6%. The improvement was largely a result of better offshore and marine margins -- 24.2% versus 19.7% a year earlier -- which offset a 3.7% slide in overall revenue to $2.29 billion, caused in part by lower sales from Keppel Land.

Following an industry-wide change in accounting treatment, Keppel’s property unit now books revenue only after it completes the building of residential projects instead of recognising it over various phases of construction. The developer’s 2Q2011 revenue fell 67.2% on year to $104.2 million. Its net profit was 64.9% lower at $50.5 million.

 

Still, judging from the pace of its new order wins, Keppel’s overall growth momentum looks poised to continue in the quarters ahead. This year alone, the group has secured $7.4 billion worth of offshore and marine orders, matching its all-time annual record, achieved in 2007. Its total net order book has swelled to $9.1 billion, which will keep its yards busy until 2014. Many of these contracts come with options for its clients to place additional orders.

 

Keppel has also bumped up its interim dividend. Investors will receive 17 cents a share, up from 14.5 cents a share a year earlier. “We see this as a signal of management’s confidence in the sustainability of its strong earnings,” says UBS. “We think the strong pick-up in offshore contracts this year means margin surprise could remain a recurring theme.”

Not surprisingly, analysts have recalibrated their earnings estimates to reflect Keppel’s above-consensus 2Q2011 performance. Goldman Sachs, for instance, has raised its 2011 forecast for earnings per share by 8%, while BNP Paribas has increased its 2011 and 2012 estimates by 1.4% and 1% respectively.

 

Overall, these changes exclude potential orders from Petrobras. Many analysts believe it’s only a matter of time before Keppel lands a few mega deals from the Brazilian oil giant. The consensus rating for the stock is still a ‘buy’.

 

In anticipation of strong demand from Brazil, Citigroup notes that Keppel has started constructing two offshore support vessels, which could be chartered out or sold. “Management sees good prospects for deepwater projects and is confident that Keppel remains well positioned to capitalise on Petrobras’ exploration and production programme.”

 

The path ahead, however, won’t be without risks. A patchy economic recovery in the US, which has yet to resolve its political gridlock on whether to raise the federal government’s debt limit, as well as Europe’s sovereign debt problems, have been singled out by Keppel as key uncertainties. In addition, capacity constraints at its yards could surface following the slew of orders secured in past quarters, although this issue could still work to its advantage.

 

“We believe Keppel is in a good position to cherry-pick high-margin projects as its yard order book is sufficiently filled for the next couple of years,” says DMG. “Keppel will benefit the most from jobs with pressing timelines.”

 

Overall, Keppel’s performance underscores the vibrant oil and gas exploration and production industry. While oil prices have softened in past weeks after the International Energy Agency released emergency oil reserves in June, they remain above US$90 ($109) a barrel, more than sufficient for energy companies to continue and even step up production work.