DBS Group Holdings Ltd’s Latest Earnings Briefing: 5 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.
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 – click here
4. Asset values are shrinking – click here
5. Can the vessels be repurposed?
As mentioned in point four, 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 is able to recover in the event where its client’s assets are liquidated.
A question was posed on whether the assets (often vessels) can be repurposed to get better value. Gupta responded:
“On the first, it is possible to repurpose, but one of my realisations over the past 12-18 months is that it’s not that easy.
Where people have been able to repurpose their ships, it takes some capex. So you’ve got to first put some money into the ship to repurpose it and then you’ve got to look at what rates you are able to get for the repurpose.”
The situation looks a lot like the “classic banker’s dilemma” that Gupta once described for the case of Swiber Holdings Limited (SGX: BGK). Back then, Gupta described the dilemma as:
“The classic banker’s dilemma. Do you put in some more money to recover more, or do you don’t put in the extra money to recover more?”
The situation is further complicated due to the current pricing environment. As Gupta explains, the repurposed ship might not get much better rates, which calls into question whether further investment is justified:
“It turns out that because of the overall climate, even repurposed ships don’t get very high rates; so there remain challenges after repurposing. [Even] if you put some money in, repurpose the ship, can put it to work [and] get cash flows, you don’t get the same kinds of rates that you used to three years ago.”
As it stands, the DBS Group head said that it is possible that the bank will have to earmark more loans under non-performing assets (NPA), should the collateral value continue declining.