Outlook for oil and gas sector remains challenging

A car is being filled with fuel as a man holds a nozzle at a Pemex petrol station in Mexico City, Mexico, on Feb 3, 2017.
A car is being filled with fuel as a man holds a nozzle at a Pemex petrol station in Mexico City, Mexico, on Feb 3, 2017.PHOTO: REUTERS

The oil and gas sector is again the villain of the piece, as more bad loans from the ailing industry turn up on local banks' portfolios.

The bottom line at DBS Group Holdings took a hit yesterday mainly from higher allowances made for loan exposure to firms in the sector.

While DBS expects to fork out less in allowances this year, the services side will remain "stretched", said DBS chief Piyush Gupta.

"On the exploration side, new investments are still not happening... It seems to me oil prices must stay stable at around US$60 for longer, or go up sharply, before we see more investments.

"In the production support segment, it's more resilient... but the real challenge is that contracts are being renegotiated down", leading to lower pricings and tight margins, he said.

His observations echoed a similarly bearish statement by OCBC chief Samuel Tsien, who earlier this week warned that the sector would see more "volatility, uncertainty and distress" over the next six months.

 

At DBS, total exposure to support services firms in the sector was about $7 billion at the end of last year, Mr Gupta said in a portfolio update.

Of that sum, $1.8 billion was exposed to big state-owned or government-linked shipyards.

Another $2.6 billion related to five big firms, one of which was brought into the non-performing category in the third quarter, followed by another in the fourth quarter. Non-performing assets in this area totalled about $800 million.

DBS reportedly has more than $600 million in exposure to Ezra Holdings, which could now be on the brink of liquidation.

The remaining $2.9 billion was exposed to 90 smaller companies. Half of this part of the portfolio has shown weakness, and three new names were considered non-performing in the fourth quarter, Mr Gupta said.

As a result, newly recognised non-performing assets totalled $779 million in the fourth quarter. But this was lower than the $1.06 billion recorded in the third quarter, and the slowdown will continue into this year, said Mr Gupta.

Wong Wei Han

A version of this article appeared in the print edition of The Straits Times on February 17, 2017, with the headline 'Outlook for oil and gas sector remains challenging'. Print Edition | Subscribe