Can Keppel survive the downward spiral for offshore yards?

The downward spiral for offshore yards has been unrelenting, fuelled largely by the fear of a drying up of new orders due to weaker crude oil prices and a tightening of credit. There is also concern that existing orders may be cancelled. Yesterday, Keppel Corp announced a US$199m new rig order, but the news has failed to overcome negative sentiment toward the sector, with the stock declining further this morning.

This may not be surprising as we view yesterday’s order as an opportunistic situation, where Keppel bought over a damaged rig for refurbishment and then sold it at a decent price. We therefore do not expect this to be sustainable.

So now, the question remains: how low can valuations go for offshore yards in the current market environment? With Sembcorp Marine, historical trough valuations are quite straightforward as its business is purely in the offshore and marine sector. Keppel, on the other hand, has exposure to multiple businesses with several subsidiaries also listed, thus making valuations more difficult to evaluate.