DBS Group Holdings Ltd (SGX: D05) estimates that oil prices could be range-bound at between US$50 and US$60 per barrel this year.
For context, oil prices traded at over US$110 per barrel in 2014. By the end of 2015, oil prices were down below US$40 per barrel. Prices have since recovered, but have remained below US$60 per barrel in 2016 and 2017 thus far.
Singapore’s largest bank, DBS Group, provides financing for companies within the oil and gas sector. The prolonged decline in oil prices, shown in the diagram above, has left several of the bank’s customers in a tight spot financially.
The most visible case would be Swiber Holdings Limited (SGX: BGK), an oil and gas support services contractor. In mid-2016, the beleaguered firm shocked the sector by filing for liquidation after being crushed by the weight of its liabilities. A day later, Swiber pulled back from the brink, and decided to file for judicial management instead.
For DBS Group, Swiber is classified as a non-performing loan (NPL).
Assumptions, assumptions, assumptions
In DBS Group’s recent earnings presentation for the first quarter of 2017, the bank was asked about how oil prices would affect its guidance for the current year’s NPL. DBS Group’s chief executive officer, Piyush Gupta, said:
“If oil stays range-bound between US$50 and US$60, then [the outcome] will be pretty much what we’re guiding.”
That is the assumption that DBS Group is making to derive its projected NPL. However, oil prices could rise or fall beyond this range. Gupta said:
“I think if oil goes to US$40 or [below], there will be more pain in our [granular] portfolio for sure.
Oil would have to go above US$60 for us to see some upside. [Based on our stress tests, even] if it gets to the high US$50s and US$60s, you would still not see a lot of deep-sea investments. I think oil would have to go over US$60 for more deep-sea investments to create some upside. [We’ve factored in oil prices around] US$50, even US$40-50.
But if it went substantially below that, you would start seeing [additional] pain.”
Gupta said that if oil prices were sustained above a level of US$60, it could lead to some upside for DBS Group. However, he is not optimistic that the possibility of higher oil prices. He added:
“I think [prices] over US$60 are hard to [sustain] to because shale would turn on at those levels. There seems to be price support [around US$50]. Certainly, OPEC and the Saudis will work very hard to support oil prices at that level. So oil prices seem to be range-bound [around those levels] right now.
This is the reasoning that DBS Group has shared. It does not mean that oil prices will definitely be in the range of between US$50 and US$60 per barrel this year. But in DBS Group’s eyes, this seems like the most possible outcome at the moment.
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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.