Oversea-Chinese Banking Corporation Limited’s View on the Oil and Gas Sector

Oversea-Chinese Banking Corporation Limited (SGX: O39) believes that the oil and gas sector will remain depressed until we see sustained higher oil prices.

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

OCBC 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.

In the second-quarter earnings, OCBC head, Samuel Tsien, explained some of the difficulties in the sector:

“At this point in time, as you know, the oil prices continues to be quite low at about $50 level. And at that level, we still feel that it would not be sufficient to bill the distressed industry sector back to a normal and a healthy state yet.”

Tsien said that there was more utilization of vessels, but the available charters were short-term in nature. Said another way, the news is better, but it is far from enough. Tsien mentioned:

“I would not say that in oil and gas sector, recovery is already on the way.

I would only say that the oil and gas sector is currently stable. But being stable is not adequate for the loans to be paid off as scheduled because you need to have continued strong cash flow to pay off those debts. So we need the oil and gas sector to actually improve before the whole situation can be classified as recovering, and I don’t think we are at this stage yet.”

As the low oil price environment drags on, OCBC will have to re-evaluate the collateral values of its clients and look at its client’s cash flow against their outstanding loans. Tsien is not optimistic at the moment:

“So the oil and gas sector distress situation is expected to continue to be in a — in the depressed state until the oil prices has seen a sustainable higher level than we are currently seeing.”

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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.