DBS Group Holdings Ltd’s CEO Shares His Views on The Oil and Gas Industry

CC0 Public Domain

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, Gupta shared his views on the oil and gas industry.

Production vs Exploration

Gupta said that the exploration side of the oil and gas industry still looks weak:

“New investments are still not happening.

Last quarter I said BP and Total had announced some investments. The Saudis still continue to invest. The Indian ONGC [oil and natural gas corporation] still continues to invest, but none of the other majors have followed through.

And at this point in time, it seems to me that either oil prices have to stay stable at roughly circa $60 for a longer period of time or they’ve got to go up sharply before you’re going to see a lot more investment.”

Gupta added that DBS Group had limited exposure to this segment of the industry. He also shared his view on the production side of the oil and gas industry:

“The good news is that [it] is a little more resilient because people still need to service their vessels and still need to keep the wells running. I said before that roughly two-thirds of the fleets are currently in use. That number is still about there, about two-thirds of the fleets are in use.”

As Gupta sees it, oil production is still ongoing and it will require services such as vessels that ferry people to and from oil wells. However, pricing for the segment is weak. Gupta said:

“The challenge with that is that contracts got renegotiated down, and therefore the pricing or the margins that people have for that part of the business shrank quite considerably. Those margins are not going up yet.

Even though oil prices [have] rebounded off the lows, from everything I can see, none of the oil majors is currently willing to renegotiate those rates with their suppliers. As best as I can tell, it’s unlikely that you will see a pick-up in margins or renegotiation in 2017. As a consequence, this part of the sector will continue to be tight.

So it is quite likely that you’ll see more slippage into NPL [non-performing loans] from this category in the course of 2017.”

To be sure, Gupta also said that it is possible that DBS Group’s NPLs in 2017 will not be as high as in 2016.

Foolish takeaway

In summation, it looks like DBS Group’s take on the oil and gas industry 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 too.

Investors will have to observe what happens in the oil and gas industry in 2017 and beyond.

For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt 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.