The Linde Group has delivered increases in both group revenue and operating profit in its 2016 financial results released today, hampered only by the lower contribution from its Engineering Division and adverse exchange rate effects.
Exchange rate effects were noticeable on the group’s Gases Division too, but underlying performance was relatively solid.
For its Engineering Division, however, the sustained low oil price is clearly still having a noticeable effect on performance – highlighting just one of the effects of this trend on the industrial gases industry.
Revenue and earnings trends in the plant construction business reflected the progress made on individual projects, but also the wider challenges facing this market; as a result of persistently low oil and gas prices, faltering demand was again to be seen in the plant construction sector in 2016.
Revenue in Linde’s Engineering Division fell in the (2016) financial year by 9.4% to €2.35bn (2015: €2.59bn), while operating profit also fell, from €216m in 2015 to €196m in 2016.
Linde also acknowledged that there is no guarantee this picture will improve in the year ahead. While recent economic forecasts indicate that the global gases market will grow at a similar rate in 2017 to that seen in 2016, in contrast the market environment in the international plant construction business could see only a slight improvement, Linde reflected, and might continue to be beset by uncertainty.
But there are still positives to be drawn from the side of the business going forward; notably the solid order backlog that Linde has and, in the long-term, hopes that the recovering trajectory in the oil market will continue.
As of 31st December 2016, the division’s order backlog remained solid at €4.38bn, compared with only a slightly higher figure of €4.54bn in 2015. Order intake in 2016 was around €2.25bn (2015: €2.49bn).
And at 8.3%, operating margin that remained the same as in the prior year is still a solid percentage to have in the financial locker. This is still above the industry average and in line with the target of around 8% that Linde had set itself for the 2016 financial year. Operating margin is expected to hold at around 8% for the year ahead.
Oil cuts – A work in progress
Looking forward, those affected by the dynamics at play in the oil business were given a glimpse of optimism earlier this week when it was announced that the 10 OPEC (Organisation of the Petroleum Exporting Countries) members moved closer to full compliance with the landmark production cut agreement signed late last year.
Output in the month fell from January levels to average 32.03 million barrels per day, according to an S&P Global Platts survey. In all, taking an average of January and February production, the 10 members obligated to reduce output under the deal have achieved 98.5% of their total combined cuts, according to the survey, up from 91% in January.
That prompted Herman Wang, OPEC Specialist at S&P Global Platts, to enthuse, “A Saudi-led OPEC is showing the market it is serious in making the agreement stick. While it remains an open question whether OPEC will achieve its goal of drawing down stocks sufficiently to rebalance the market, OPEC is fulfilling its commitment, certainly in contrast to non-OPEC partners who are some ways from cutting down to their agreed levels.”
Non-OPEC compliance continues to lag behind OPEC’s adherence to the deal, with Russia, for instance, only reducing output by 121,300 barrels per day in February, according to its energy ministry – against a commitment to a 300,000 barrels per day cut from October levels. Russian officials have insisted, however, that their production cuts would be phased in and completely achieved by May.
With Russia leading 11 non-OPEC countries in agreeing to cut output by 558,000 barrels per day in the first half of 2017, and the demonstrable progress that OPEC members are making in their own reduction commitments, brighter signs may be in prospect for this influential market and those so affected by it in the long haul.