Sunday 17 December 2017

What Keppel Offshore & Marine's Order Book Can Tell Us

I sold Keppel Corp at $6.16 in Jan this year, expecting its Offshore & Marine (O&M) segment to start showing losses. Yet, for 3 consecutive quarters, Keppel O&M has surprised me with either breakeven or a small net profit of $1M. How did it achieve this feat, and will it continue to at least break even for the coming quarters?

The answers can be partially found in Keppel O&M's order books. Fig. 1 below shows the order book based on the financial results for Q3 FY2017.

Fig. 1: Keppel O&M Delivery Order Book for Q3 FY2017

As shown in the figure above, Keppel O&M has been completing the projects ahead of time. For deliveries in FY2018, the gross contract value is $1,052M, but it has completed 85% of the contracts, leaving only $156M yet to be completed. Similarly, for deliveries in FY2019, it has completed 78% of the gross contract value. The faster Keppel O&M completes the contracts now, the less revenue it can report in the subsequent quarters. 

Fig. 2 below shows the changes in % completion of Keppel O&M's order books for the past 3 years, based on the financial results for Q3.

Fig. 2: % Completion of Keppel O&M Order Book

The figure validates the point that Keppel O&M has been completing the contracts well ahead of time. For deliveries 2 years out, the % completion has risen from 54% in 2015 to 78% in 2017. The good news is that Keppel O&M has been winning more orders this year for deliveries 3-4 years later. For these new orders, there is still a lot of work to be carried out.

Although Keppel O&M has been completing the orders speedily, customers are not eagerly awaiting to collect the vessels, given the difficult business conditions in the Oil & Gas industry and likely difficulties in securing financing for the vessels. Referring to Fig. 1 above, as at end Sep 2017, there are vessels worth a total of $3,515M waiting to be delivered in the last 3 months of 2017. 

Not all of these orders will be delivered. Some will be deferred. For as long as the vessels are not collected by owners, the vessels will hold up valuable working capital. Nevertheless, for vessels in which the owners are unwilling or unable to take delivery, Keppel O&M might be able to sell off the vessels to other third parties, similar to the deal between SembCorp Marine and Borr Drilling.

For an anlysis of which customers are proceeding with their orders as planned and which are deferring their orders, you can refer to Fig. 3 below. By right, if customers are proceeding with their orders as planned, the orders should move up one time zone as the time progresses, i.e. a order meant for "delivery 2 years later" in 2015 should become "delivery next year" in 2016 and "delivery with the same year" in 2017. The advancement of these orders are indicated by the blue lines. For orders that are deferred, they stay in the same time zone or even later. The deferments are indicated by the red lines. Some orders might also be split such that parts of it are on schedule while other parts are deferred, e.g. Petrobras orders in 2015 ended in 3 time zones in 2016. These are indicated by the orange lines.

Fig. 3: Movement in Keppel O&M's Deliveries

From the figure above, it shows that deferments have slowed down from 2016 to 2017 and more orders are progressing as planned. Now is the time to wait for customers to show up and collect their vessels. As mentioned above, $3,515M worth of vessels are waiting to be collected in the last 3 months of 2017. 

Moving forward, there are 2 points to watch for Keppel O&M. Firstly, will customers collect the vessels they ordered (or Keppel O&M sells them to third parties) and secondly, will they get enough new orders to replenish these orders which are mostly completed. 

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