Keppel O&M faces challenging prospects

IT may be that Keppel Offshore & Marine (Keppel O&M) is able to "draw a line" under its corruption scandal in Brazil - as Keppel Corporation chief Loh Chin Hua has put it, but the road to recovery is likely to remain an uphill one.

On top of having to take on stricter compliance controls in its operations and working to restore the trust of its stakeholders, Keppel O&M still has to deal with a myriad of issues on the business front, including rising competition and a diminished manpower and engineering capacity.

And then there is the possibility of Keppel O&M being sidelined, now that the larger Keppel group appears to be focusing more on the property business - its biggest contributor to earnings in recent years.

Last week, Keppel booked its first quarterly loss of S$495.8 million for the fourth quarter to Dec 31 last year, on the back of a S$619 million charge relating to Keppel O&M's global resolution for corrupt payments made by a former agent in Brazil.

The one-off S$619 million sum included Keppel O&M's US$422 million in fines as part of the resolution, and related legal, accounting and forensics costs.

Indeed, it seems Keppel O&M will be able to tide over the costly fines because the Keppel group, as a whole, has enough cash to help foot the bill.

In an earlier statement on Dec 23, when news of the corruption scandal first broke, Keppel had already said it has the financial resources to pay the penalty. Much of this may have been offset by divestment gains made by the group last year, most notably in the property business.

More such gains could also come in to bolster cash flow, such as that from the sale of Keppel Cove, if completed. Keppel Land China inked an agreement last October to sell its stake in Keppel Cove, a marina development in China's Zhongshan city, for 2.9 billion yuan (S$611.2 million), although this deal is being blocked by the project's minority shareholder.

So for Keppel O&M, paying the financial penalty - and other compliance implications related to the global resolution - is one hurdle it is poised to cross.

But others remain.

Where Brazil is concerned, Keppel in its latest quarter also made an S$81 million provision for losses tied to its Sete Brasil rig-building projects - piling on to a S$230 million impairment it had put aside for the projects previously. Could this be a sign that provisions for Keppel O&M are not yet over and done with?

At the same time, manpower and engineering capabilities, as well as cost and risk appetite are "crucial areas" that Keppel O&M must work on in order to remain competitive in the new offshore and marine landscape, said IHS Markit Asia-Pacific lead for yards and fabrication Ang Dingli.

"During this downturn, Keppel O&M has laid off quite a significant portion of its workforce (probably including project managers and engineers). But when demand does return, it will need to bring these costs back competitively," he told The Business Times. This is particularly as the firm has to contend with players from China, where costs are low, but where quality is improving at the same time.

Mr Ang believes that Keppel O&M will be able to maintain its edge over Chinese firms for the next five years, "but if things remain stagnant, it will eventually lose out".

With these issues still buffeting Keppel O&M, it seems Keppel's offshore and marine business could gradually take a back seat in the group's wider strategy, especially as it forges on with its diversification strategy.

One market observer even noted that the offshore and marine business already seems to be facing "certain neglect". "It could be a short-term focus on what is doing better (property), or it could be a corporate shift, given that most of Keppel's top guys now are not from the offshore and marine industry," he suggested.

Clearly, dealing with the financial fallout from the corruption scandal is just one of Keppel O&M's challenges.

With demand still yet to return in a big way amid still-prevalent risks in the offshore drilling market, the company may have to work longer and harder to return to the pink of health, and to remain a relevant part of the larger Keppel group.