DBS, OCBC and UOB exposed to downturn in energy sector
The plunge in oil prices is catching up with Singapore’s three largest banks.
Last week, Swiber Holdings Ltd., a small Singapore company that provides construction services for international oil and gas projects, filed a petition to liquidate its operations, after facing payment demands from creditors at a time when its business was under pressure. DBS Group Holdings Ltd., one of Swiber’s largest lenders, said it only expects to recover about half of the S$700 million ($522 million) it loaned to the firm and its units. Swiber subsequently said it’s dropping the liquidation in favor of a restructure plan.
DBS and Singapore’s two other large banks, Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., are exposed to the downturn in the energy sector as a result of their lending to local companies which provide construction, shipping and maintenance services to the oil and gas industry. Many of those companies are suffering as the plunge in crude prices since 2014 curtailed exploration and other activity by oil and gas producers.
The financial health of the energy-services companies is the “key concern” for UOB over the next one or two years, Chief Executive Officer Wee Ee Cheong said at a media briefing Thursday on the bank’s second-quarter results. The bank’s exposure to Swiber is “manageable,” Wee said, though he noted that the wider difficulties in the oil and gas services industry were a factor behind the 17 percent climb in UOB’s nonperforming assets for the second quarter.
Debt Restructuring
Swiber said it will drop its liquidation application in a statement on Friday. Instead, the company plans to operate under a judicial management, which would allow it to continue operating under court supervision while it attempts to turn its business around. Some of its lenders had sought judicial management to recover more of their loans, according to people familiar with the talks who asked not to be identified because the discussions were private.
“I presume it helps them buy time but it’s uncertain how viable these oil-services companies are if oil prices remain low for an extended period of time,” said Alan Richardson, a Hong Kong-based fund manager at Samsung Asset Management, which owns DBS shares. “The indirect victims of these bankruptcies are the banks who are lending money to them.”
Shares of DBS were little changed at S$15.40 as of 11:02 a.m. local time on Monday, paring this year’s loss to 7.7 percent. OCBC gained 0.8 percent and UOB rose 0.6 percent.
Oil has slipped about 19 percent from its recent peak in early June, ending a recovery that saw prices almost double from a 12-year low in February. Prices are falling again as U.S. producers increased drilling amid a glut of crude and fuel supplies that are at the highest seasonal level in at least two decades.
Moody’s Downgrade
The recent recovery in oil prices from their lows has provided only modest relief, OCBC Chief Executive Officer Samuel Tsien indicated Thursday in a media briefing on the bank’s second-quarter results, which included a 61 percent jump in nonperforming assets.
“We cannot say it’s going to be the bottom yet. We may have two more quarters to go,” Tsien said in response to a question on the rise in delinquent energy sector loans.
Oil and gas-related loans made up 5.3 percent of gross lending by Singapore banks as of December, a higher proportion than at banks in Korea, Thailand and the European Union, according to Moody’s Investors Service. The deteriorating quality of the Singapore banks’ loans to energy firms, as well as weaker regional economies, prompted Moody’s to downgrade its outlook for the three largest lenders on June 30.
UOB and OCBC’s exposures to offshore marine services companies amounted to 13 percent to 18 percent of their common equity Tier 1 capital and loan-loss reserves at the end of June, Moody’s said in a statement Monday.
DBS is due to report its second-quarter results on Aug. 8.
In a sign of how fast the bad-loan problems are worsening, OCBC said new nonperforming assets jumped 91 percent to S$924 million in the second quarter, mainly because of companies linked to the oil and gas support services sector. Newly soured assets at UOB more than doubled to S$802 million, from S$372 million a year ago.
“New nonperforming-loan generation was the highest seen in this NPL cycle so far,” Aakash Rawat, a bank analyst at UBS Group AG in Singapore, said in a report last week. “While this was cushioned somewhat by recoveries and upgrades this quarter, it is debatable whether this will continue to be the case in future.”
The SGX Oil & Gas Index, which tracks 25 locally listed firms, fell to a record low last week after news of Swiber’s problems surfaced on Thursday. Among the biggest decliners on the index was Ezra Holdings Ltd., which provides engineering and construction services to the offshore oil and gas sector. Ezra shares plunged 17 percent last week.
Another indicator of the woes among Singapore oil and gas service firms comes from the bond markets. A total of 10 Singapore-listed firms in the sector, including Swiber, have asked bondholders to loosen their covenants so far this year, versus eight in all of 2015, according to data compiled by Bloomberg. That includes efforts to extend the maturity of debt and loosen covenants requiring companies to maintain certain leverage levels.
Oil-related firms have S$1.4 billion of Singapore-dollar securities maturing through 2018, with S$325 million due by the end of this year, according to Bloomberg-compiled data on July 18.
Among the three large Singapore banks, only DBS has disclosed its exposure to Swiber. OCBC isn’t listed among the oil and gas services firm’s main bankers in its 2015 annual report. UOB’s Wee didn’t quantify the bank’s lending to Swiber at the Thursday media briefing. - Bloomberg
Swiber Holdings to restructure its business
Big exposure: People queue up to withdraw money from DBS automated teller machines at a mall in Singapore. DBS Group Holdings Ltd, South-East Asia’s biggest lender, said it has about S700mil (US523mil) in total exposure to Swiber. – Reuters
SINGAPORE: Swiber Holdings Ltd, the Singapore-based offshore oil and gas services group, said it was dropping liquidation plans and intends to restructure its business following talks with the company's major financial creditor.
Swiber plans to operate under so-called judicial management, according to a statement to the Singapore exchange last Friday. The arrangement would allow the company to continue operating under court supervision while attempting to turn around the business.
Some of its lenders had sought judicial management to recover more of their loans, according to people familiar with the talks who asked not to be identified because the discussions were private.
Swiber filed a petition last Wednesday to wind up and liquidate itself after facing US$25.9mil of demands from creditors.
The company had US$1.43bil in liabilities and US$1.99bil in assets at the end of March, according to its financial statements.
News of Swiber's liquidation plans dragged down the SGX Oil & Gas Index to a new low. Local companies that rely on contracts within the offshore oil and gas market are reeling from a collapse in oil prices.
Last year, a measure of the country's bad-loan ratio reached the highest level since 2009, according to the Monetary Authority of Singapore.
The Singapore bourse said last Thursday it will be undertaking a “thorough investigation” into developments at Swiber after the company made key disclosures only after queries from the regulator.
Swiber on July 11 said it failed to get a US$200mil equity injection from AMTC Ltd, which had agreed to subscribe to preference shares.
DBS Group Holdings Ltd, South-East Asia's biggest lender, said last Thursday it has about S$700mil (US$523mil) in total exposure to Swiber. The bank said it expects to recover half of that amount.
Swiber in June redeemed S$130mil of 5.125% notes and in July redeemed S$75mil of 7% securities.
It has four more Singapore dollar bonds worth a total of S$460mil outstanding, according to data compiled by Bloomberg. – Bloomberg
Slippery slope for oil
Prices unlikely to go up too high for the rest of the year
PETALING JAYA: The continued oil supply glut in the market could mean a sustained low oil price environment, especially in the short to medium term.
The oil supply glut does not seem to be abating, with oil majors preferring to pump and store oil at the moment instead of cutting production.
According to unconfirmed reports, India is mulling over the idea of setting up a strategic petroleum reserve to store oil, similar to the ones that have been established in the United States and China.
As it is now, the ample amount of oil that has been extracted from underground is making its way to even more storage above ground. For instance, very large crude carriers (VLCCs) are increasingly being used for the storage of excess oil, with the tankers lying idle offshore in places such as the coasts of the United Kingdom.
According to the Financial Times, the supertankers have become the temporary centre to store excess oil and the ships are found off the coast of Scotland, where sea conditions are rough.
The International Energy Agency (IEA) in its latest Oil Market Report said that non-Organisation of the Petroleum Exporting Countries (Opec) production remains on course to fall by 0.9 million barrels per day (mmbd) this year, before staging a modest recovery in 2017.
However, the IEA said production from Opec countries has seen steady growth in recent years, with notable increases contributed by Iraq in 2015 and Iran in 2016.
“Our chart shows that, in fact, the oil output from the region rose to a record high in June, with production above 31 mmbd for the third month running. As such, the Middle East market share of global oil supplies rose to 35%, the highest since the late 1970s,” the IEA said in its report.
According to analysts, these concerns may return to haunt oil prices and US$40 could be the new normal for the time being.
Oil prices have staged a strong recovery since their January 2016 lows, gaining some 56% to their seven-month high of US$52.31 last month. The commodity, however, has since lost almost half of its gains.
It had gained on expectations by oil companies and Opec producers that the worst was over after hitting its January 2016 lows. However, Bloomberg reported that oil declined again in its biggest monthly drop in a year, as US producers increased drilling for a fifth week.
The increase in drilling by US producers came amid a glut of crude and fuel supplies that are at the highest seasonal level in at least two decades.
Oil prices have lost some 20% from their June 2016 seven-month highs and were last traded at US$41.63 per barrel.
Analysts said that oil could keep trending lower in the immediate term and that if it breaks the US$40 level, could challenge the next key psychological price mark of US$35.
Interpacific Research’s head of research Pong Teng Siew told StarBiz that he was “quite sure” that oil would be lower as short bets have piled up due to fundamentals.
“Many traders have reversed their long positions and have taken up shorts instead which will drive the oil market lower. My thinking is that the oil market today has got a tendency of being lower than what anyone expects, especially if momentum carries it through,” Pong said.
“I think it will drop below US$40 per barrel, and there is a likelihood that it will keep surprising people at this point in time. It also does not seem that the worst is truly over, and my worry is that the number of US rigs, especially in shale oil, appear to be on the upswing and there is no telling how much more is to come,” he added.
Pong noted that the demand side has picked up since January 2016, but that the take-up pace has been slower than before with the growth in supply.
“Demand was (then) tethered to China’s oil purchases for its strategic petroleum reserves, but that is now at full (capacity) and has seen demand tapering off, resulting in lower oil prices,” he said.
The IEA said that while market balance was seen in mid-summer 2016, the existence of very high oil stocks is a threat to the recent stability of oil prices, noting that in the first quarter of this year, refinery runs growth was 60% higher than refined product demand growth.
“Despite the regular upward revisions to demand that we have seen in recent reports, there are signs that momentum is easing, and although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices,” the IEA said.
Social Economic Research Centre’s executive director and independent economist Lee Heng Guie said that fundamentals today may cause oil prices to continue to remain weak.
Lee said at this point in time, there may be a slight challenge when the next budget is tabled or planned, but that there is comfort that the oil revenue to the Government’s coffers is now at a low level of about 19%.
“The goods and services tax (GST) will make up for the shortfall, but this also depends largely on the health of the local consumer. If household spending remains cautious, then there will be an impact to the GST collections,” he added. - By daniel Khoo The Star/Asian News Network
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