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PR Newswire
16-03-2011, 10:32 AM
cif5000,
When an established contractor or service provider (like Keppel or Rotary) in the O&G sector gets a new major contract, of course it is reasonable to expect the company to make a decent profit from it. However, we should bear in mind that whatever real profit - as opposed to accounting profit based on the usual "percentage of completion" accounting method - will be earned only upon the successful completion of the underlying work and the contract, which will usually take 2 to 3 years at the least. We should also bear in mind that by its nature, the O&G sector is highly cyclical, where a period of boom is followed immediately by a period of depression in demand and prices. So it is unlikely that an O&G contractor or service provider should command high, steady and rising market or investment value over the longer term.
Of course, one can always find a few exceptionally good and well-managed companies even in a cyclical industry, or for that matter also in the steel stockist trade.
By looking at the local listed steel stockists, it is quite clear that a few seem to be able to make a profit - even though the profit does fluctuate a lot over time - year after year. I guess this is mainly due to their smart and prudent management. I should add that apart from during short periods of strong demand for steel products from the O&G and other sectors, steel stockists are able to earn good/super profits during periods of rising prices - that is if they have made early and the right bets in stocking up inventory at lower prices. It is my understanding that for big O&G construction projects, for cost-saving reason most big contractors will choose to buy the bulk of the required steel and other materials directly from steel mills and other suppliers overseas, and use the local steel stockists mostly for the balance and smaller requirements.
When an established contractor or service provider (like Keppel or Rotary) in the O&G sector gets a new major contract, of course it is reasonable to expect the company to make a decent profit from it. However, we should bear in mind that whatever real profit - as opposed to accounting profit based on the usual "percentage of completion" accounting method - will be earned only upon the successful completion of the underlying work and the contract, which will usually take 2 to 3 years at the least. We should also bear in mind that by its nature, the O&G sector is highly cyclical, where a period of boom is followed immediately by a period of depression in demand and prices. So it is unlikely that an O&G contractor or service provider should command high, steady and rising market or investment value over the longer term.
Of course, one can always find a few exceptionally good and well-managed companies even in a cyclical industry, or for that matter also in the steel stockist trade.
By looking at the local listed steel stockists, it is quite clear that a few seem to be able to make a profit - even though the profit does fluctuate a lot over time - year after year. I guess this is mainly due to their smart and prudent management. I should add that apart from during short periods of strong demand for steel products from the O&G and other sectors, steel stockists are able to earn good/super profits during periods of rising prices - that is if they have made early and the right bets in stocking up inventory at lower prices. It is my understanding that for big O&G construction projects, for cost-saving reason most big contractors will choose to buy the bulk of the required steel and other materials directly from steel mills and other suppliers overseas, and use the local steel stockists mostly for the balance and smaller requirements.