Swiber Holdings Limited (SGX: BGK), a services provider within the oil & gas industry, has been in a bit of a pickle recently. And, this has left one of its lenders, DBS Group Holdings Ltd (SGX: D05), with a sour taste in its mouth. The pickle On 11 July 2016, Swiber revealed that it had failed in its attempt to raise US$200 million from a preference share sale. Then on 28 July 2016, Swiber released two statements. One revealed that it had received letters of demand for payments totaling US$25.9 million. The other was shocking – Swiber announced it had
Swiber Holdings Limited (SGX: BGK), a services provider within the oil & gas industry, has been in a bit of a pickle recently. And, this has left one of its lenders, DBS Group Holdings Ltd (SGX: D05), with a sour taste in its mouth.
On 11 July 2016, Swiber revealed that it had failed in its attempt to raise US$200 million from a preference share sale.
Then on 28 July 2016, Swiber released two statements. One revealed that it had received letters of demand for payments totaling US$25.9 million. The other was shocking – Swiber announced it had filed an application to wind itself up.
The next surprise wasn’t too far away though. Just a day later, Swiber changed its mind about winding up and decided to place itself under judicial management instead.
There are lessons learnt by DBS Group from this debacle. In DBS Group’s recent 2016 third quarter earnings briefing, the bank’s chief executive, Piyush Gupta, was asked about the changes it has made in light of the Swiber experience.
It’s oil and gas but it’s different
During DBS Group’s 2016 second quarter earnings presentation held in August this year, Gupta made an argument that Swiber was not representative of the entire oil and gas industry.
Gupta mentioned that Swiber is a long-time DBS Group client. He said that Swiber was best described as a contractor. Furthermore, the financing that DBS Group provided to Swiber was based on two projects the company had with a customer that DBS Group also knew well.
But DBS Group has become more cautious about contractor-type companies since the Swiber incident. Gupta said during DBS Group’s 2016 third quarter earnings presentation:
“One of the changes we’re making – we again alluded to it the last time – and not just oil and gas but across our portfolio – is how we think about contractor companies.
The Swiber situation, as I pointed out, is really a contractor which effectively raises supplies, goes, does work, etc. And so our traditional view has been that this is working capital finance, it generally tends to be low risk.”
The Swiber incident revealed some flaws in DBS Group’s traditional views on contractor-type companies in the oil & gas industry.
A fresh look
Gupta was candid in his assessment of the Swiber debacle. The traditional premise that contractors are viewed as low-risk did not quite hold up when it came to Swiber. DBS Group’s ability to recover its losses also proved to be limited. Gupta explained in the bank’s 2016 third quarter earnings presentation:
“However, it’s quite clear also that in situations of this sort, you wind up with a lot of unsecured exposure. And so even though you have, technically, security over the underlying inventory, the steel and the pipes and so on, you really can’t do very much with that underlying inventory.
So we’re taking a completely refreshed view to our contract exposure across our entire portfolio. In fact, we’ve already created new lending guidelines to our contractor segment.”
To be sure, Gupta is not throwing in the towel on the oil and gas industry just yet. He explained the additional steps that DBS Group has taken. Gupta said:
“We’re looking at improving early warning signals in the sector, for example. But as a general theme, the energy [contracts] should continue to be a very significant part of the GDP of the world, and certainly in our part of the world.
And so we continue to anticipate supporting clients in this sector; we continue to anticipate working with clients over a period of time.”
Time will tell if DBS Group is able to recover from its losses at Swiber. As it stands, a number of Swiber executives are being investigated by the Commercial Affairs Department (CAD). Swiber’s work with its customer, Oil and Natural Gas Corporation, was also suspended earlier this month.
For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.