The Linde Group’s newly released 2015 results show a group revenue rise of 5.3% to €17.9bn and a similar increase in operating profit, up 5.4% to €4.1bn.
Positive exchange rate effects, particularly in the first six months of the year, belied an actual 2.3% decline in group revenue, however, compared to the prior year.
With revenue in the Gases Division up 2.1% after adjusting for exchange rate effects and changes in the price of natural gas, the year-on-year weakening in group revenue was attributed to a fall in revenue in the Engineering Division from the record level achieved in 2014.
The news follows up a shot across the investment bows toward the end of last year. Linde announced on 1st December that it had adjusted its medium-term targets for 2017, tempering its expectations for Return on Capital Employed (ROCE), due to substantially changed overall conditions compared to October 2014 – when those targets were originally defined.
A significant factor in this was a reduced contribution to operating profit from the group’s Engineering Division, itself affected by the medium-term low oil price and the resulting investment hesitancy of its customers.
So just how much has the impact of continued low oil prices affected Linde’s otherwise solid performance?
Revenue and earnings trends in Linde’s international plant construction business reflected the progress made on individual projects. Moreover, revenue in the 2015 financial year was particularly affected by low order intake in the first six months of the year.
In cold hard numbers, revenue in the Engineering Division in 2015 fell 16.5% – to €2.5bn – compared with the record figure of €3.1bn achieved in 2014. Operating profit was €216m, compared to €300m in 2014. Cited as a direct result of the current low oil prices and weaker demand in the plant construction sector, order intake in the 2015 financial year was just under €2.5bn – down from €3.2bn in 2014.
Linde does, however, point to an operating margin for the division (8.3%) that’s still above the industry average and in line with its target of around 8% for the 2015 financial year. Furthermore, the company derives confidence from a strategic partnership it entered with Gazprom at the end of 2015, shortly after which it announced the deal’s first plant construction contract; Linde will be responsible for engineering and procurement for what will be one of the world’s largest gas processing projects in eastern Russia.
The project includes plants for the extraction of ethane and liquefied gas components and plants for the separation of nitrogen, as well as a helium extraction plant.
Despite the depressed oil market, Linde also has a high order backlog to fall back on in the Engineering Division. As of 31st December 2015, this backlog stood at €4.5bn, only marginally down on the 2014 figure of €4.6bn.
What will this mean going forward?
In the immediate term, Linde expects the market environment in the international plant construction business to continue to be influenced by the low price of oil. Its expected range for revenue in the Engineering Division in 2016 is between €2bn and €2.4bn, below the figure achieved in 2015.
In the longer-term, it is widely anticipated that oil prices will recover and restore stability in related project activity across the globe, which would surely see an even stronger order backlog for Linde’s Engineering Division.
Further still, we would be minded not to forget the impact of a newly rejuvenated Iranian market in the years ahead. One might suggest that events in Iran will potentially drive an upward trend in engineering project activity for many European companies, as the country seeks to realise its expected multi-billion dollar flood of investment in the next few years.
Though the company has consistently refused to comment, rumours have circulated for months concerning Linde’s involvement in future projects in Iran’s petrochemicals business, with speculation that the company has also offered to ‘help’ Iran complete its LNG projects, including the LNG Pars and LNG Persian ventures.