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Is the Worst Over for The Oil and Gas Industry? DBS Group Holdings Ltd’s CEO Answers

DBS Group Holdings Ltd  (SGX: D05) has struggled with its exposure to the oil and gas industry in 2016.

The leading Asian bank registered 6% growth in total income and a 10% increase in profit before allowances in the year. However, a massive 97% jump in specific provisions (SP) pulled the bank’s net profit for the year down by 9%. The reason behind the increase in SP was due to weakness in DBS Group’s oil and gas portfolio.

During the bank’s 2016 fourth quarter earnings briefing, its chief executive officer (CEO), Piyush Gupta, expressed hope that the bank’s non-performing loans (NPLs) in 2017 may not be as high as in 2016.

His view prompted a question from analysts: Is the worst over for the oil and gas industry?

Prolonged pain?

In response to the question, Gupta said:

“I don’t think the worst is over, I think it’ll be prolonged. I think at current – it’s hard to say where oil prices will wind up – range of oil price estimates – I’ve seen them from $55 to $75 – but if you figure oil prices hanging at around the $60-odd level, it’s not clear to me that that will attract a lot [of] new investment in the exploration side of the sector.

And so I think, at that level, you need oil prices sustained for a longer period of time before investment starts coming back.”

Gupta’s thoughts very much matches the subdued views that major oil and gas players in Singapore, such as Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51), have regarding their business conditions.

Overly optimistic?

There were more questions for the DBS Group CEO during the earnings briefing.

One analyst challenged Gupta on his view that the oil and gas industry had stabilised in 2016. The analyst pointed out that DBS Group appeared to have been caught off-guard in the case of Swiber Holdings Limited (SGX: BGK).

Swiber was on brink of liquidation in July 2016 when it changed its mind and placed itself under judicial management instead; DBS Group is a major lender to Swiber.

Gupta responded:

“I’m not sure we said stability. I said the sector will continue in a period of protracted pain. [But] we took some big hits [last] year, [and] we don’t expect to do that again.”

When asked about what areas within the oil and gas space could be the weakest for DBS Group, Gupta said:

“Our biggest weakness was the contractor space. In the contractor space, our assumptions around what was the size of the damage were wrong. So we don’t have any more of this thing.

But what else could go wrong?

Fundamentally we assume that there is some value in the ships and anecdotally [we’ve been] able to get value, but that could change. If it turns out that nobody wants to buy these ships and let’s say the oil price goes back [down], nobody thinks there’s any future for the ships, then you’re going to [have to] sell the ships for scrap value. Then there’ll be a much bigger hole than we anticipate right now. That [is what] could go wrong.”

DBS Group has five major borrowers in the oil and gas support services space. This group represents an exposure of $2.6 billion for DBS Group at the end of 2016. In his earlier comments, Gupta said that two major contractors from the oil and gas support services portfolio have been classified by the bank as NPLs during 2016. The remaining three major borrowers are not contractors.

Investors will have to observe what happens in the year ahead. This may be an area to watch for DBS Group as 2017 unfolds.

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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 companies mentioned.