DBS Group Holdings Ltd’s Latest Earnings Briefing: 4 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 – click here

2. Cutting prices down to the bone – click here

3. Not a cent more

In the second-quarter earnings, DBS Group head Piyush Gupta said that the oil and gas support services companies are not getting paid sufficiently by their customers. The outlook does not look great either, Gupta said:

“This continues to be the case, and as long as oil prices stay in this range, I’m seeing it to be very hard for the sector to regain any degree of pricing power. If you look at the announcements [of the oil majors], they’re all factoring in a long-term view that oil will stay at $50 and, therefore, they’re recalibrating their costs to a $50 oil price.

As a consequence, they refuse to pay the suppliers any more than they paid in the last year or two, and therefore pricing is really being challenged for most contractors.”

At the moment, the oil and gas services companies lack the bargaining power to demand better pricing from their customers.

4. Asset values are shrinking

The lack of pricing power also affects the value of the assets of DBS Group’s clients. The situation could affect how much cash DBS Group can recover in the event where its clients’ assets are liquidated. Gupta said:  

“Our latest set of collateral values are almost 40- 50% lower than this time last year. Collateral values are reflecting the fact that there is no pricing power in the sector.”

The DBS Group head stated that it is possible that the bank will have to earmark more loans under non-performing assets (NPA), should the collateral value continue declining.   

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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.