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Oversea-Chinese Bank Corp Limited’s CEO On Why US$60 Oil Is Needed for A Recovery in The Oil and Gas Industry

The oil and gas industry continues to be in the funk. And as a lender to the industry, Oversea-Chinese Banking Corp Limited (SGX: O39), one of Singapore’s largest banks, is not spared.

In July last year, Swiber Holdings Limited (SGX: BGK), a support services provider in the oil and gas industry, decided to file for judicial management. As one of its major lenders, DBS Group Holdings Ltd (SGX: D05) was dragged into the fray. Recently, another oil and gas support services provider, Ezra Holdings Limited (SGX: 5DN), filed for bankruptcy as its financials gave way under the heavy weight of debt.

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There have been concerns among investors over whether the oil and gas troubles will claim more victims. Samuel Tsien, OCBC’s chief executive officer, shared his thoughts on the future of the oil and gas industry during the bank’s 2016 fourth quarter earnings briefing:

“Despite the fact that the oil price has risen to above US$55, our estimation is that on a lender basis, we probably need to see about US$60 on a sustainable basis before the charterers is going to come back in to enter into longer or medium-term contract with the equivalent suppliers.”

In other words, Tsien believes that charterers (who are customers to OCBC’s oil and gas clients) would likely need to see sustained higher prices for oil before longer contracts are signed. Tsien suggested that oil prices of US$60 per barrel would be the desired level.

In fact, even higher prices may be needed. Tsien added:

“For the operators to be able to earn the margin that they will require for their operation, we think the oil price should be at about $70 or above before they can earn a reasonable margin.

So although you see increases in oil prices, we really need oil prices to be sustainable and, for the charterers of these equipment, to see that this is going to be the bottom and then they will come back in and engage the medium-term charters. Before that happens, it is quite difficult to say that this is the end of the difficulty that our oil and gas clients are under.

As a result of this outlook, and as a result of the more recent developments, we have decided to take more provisions in the fourth quarter.”

The stresses in the oil and gas industry has had an impact on OCBC – the bank took S$484 million in special provisions for 2016. Much of this is related to OCBC’s oil and gas portfolio of loans. OCBC thinks the stress in the industry is set to continue. Tsien noted:

“And, as we have said many times in the past briefings like this, we continue to believe the stress situation in oil and gas is going to continue.”

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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 company mentioned.