DBS Group Holdings Ltd’s Latest Earnings Briefing: 2 Key Challenges in the Troubled Oil and Gas Sector

DBS Group Holdings Ltd (SGX: D05) believes that the oil and gas sector has several obstacles to overcome.

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 remain below US$60 per barrel thus far.

Source: NASDAQ

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.

1. Limited new business activity

In the second-quarter earnings, DBS Group head Piyush Gupta explained some of the difficulties in the sector:

“Now, the sector continues to stay challenged, and as oil struggles to get over $50, and as long as oil is staying in the $45-$50 range, two things are happening. One, there is very little new development activity happening [for those in the industry] supporting drilling and exploration. That has been challenged for two years and that is already factored in.”

The first challenge is the lack of new development activity for drilling and exploration. That could mean less business to go around for oil and gas support services.

2. Cutting prices down to the bone

But the second challenge is even more dire:

“But the other thing that is happening is even in producing wells and servicing, while the contracts are picking up somewhat, the oil and gas service players don’t have any pricing power. While they’ve been able to get short-term contracts and roll-over contracts, they’re not able to price up. At the prices they’re getting for the contracts right now, they’re barely able to cover opex, so it’s really hard for them on a sustained basis to cover [payments on] interest and principal.”

The second challenge is where it starts to hit banks like DBS Group. As Gupta puts it, the prices that its clients are getting is barely sufficient for it to cover operating expenses. The tight financial situation leaves little room to pay the loan interest and principal that is owed to the bank.

The view of the oil majors point towards oil prices staying at around US$50. If so, DBS Group might continue to face clients that are unable to keep up with their loan repayments.  

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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.