The company’s O&M division generates 60 percent to 70 percent of the company’s net income. Consequently, Keppel’s stock price is strongly correlated to the price of oil, which also affects its valuation. High oil prices generally result in more orders from drillers, which benefits Keppel’s mighty O&M division. Oil prices have been volatile recently, but the industry’s fundamentals remain strong. According to Royal Dutch Shell (NSYE: RDS.A), oil prices of USD70 to USD80 per barrel are strong enough to allow companies to develop most oilfields–even smaller and deeper fields.

In fact, most oil companies factor in lower prices for oil–in the neighborhood of USD60 to USD80 per barrel–when they perform their modeling for new projects. This means that the current price of oil should be strong enough to support further spending by oil companies.

In recent news, Sete Brazil, a holding company established by Brazilian oil and gas giant Petroleo Brasileiro (NYSE: PBR), better known as Petrobras, recently awarded Keppel a USD809 million contract for a new semisubmersible rig slated for delivery in the fourth quarter of 2015.

The new rig will use Keppel’s proprietary design–known as DSS TM 38E–which amounts to an improved version of Keppel’s fifth-generation deepwater rigs used in Brazil, West Africa and Gulf of Mexico.

The contract boosted Keppel’s 2011 order book of new contracts to USD7.6 billion–setting a new record for the group and surpassing the 2007 high of USD5.7 billion. New estimates indicate that Keppel will secure about USD4 billion in new rig orders in 2012, excluding orders from Petrobras.

However, the order from Sete Brasil is a sign of Petrobras’ confidence in Keppel’s proprietary design. With the Brazilian company planning to increase oil production, Keppel should receive more orders from Petrobras in the near future. 

Source: Keppel Corp

Keppel is a growth stock. But the company’s strong financial position enables it to weather any financial crisis. Companies such as Keppel will be the first to emerge from a downturn and will do so stronger than ever. We’ve long recommended that investors accumulate stocks of rock-solid companies during times of uncertainty–a strategy that will allow investors to make gains when the markets turn around.  

Keppel’s stock trades at about two times book value, with a return on equity of about 22 percent. By comparison, Keppel shares traded at 0.7 times book value during the 2001 market upheaval and about 1.3 times book value in the most recent 2008-09 financial crisis.

These may not be trough valuations, but Keppel’s shares still trade at a discount to the stock’s long-term average of 2.4 times book value–presenting long-term investors with a good entry point.

Keppel’s stock trades at an undemanding 11 times projected earnings and the company’s share price should climb as the market recognizes the company’s rock-solid fundamentals. With a dividend yield of 4.5 percent, Keppel Corp remains a buy up to USD20.