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Oil firms facing restricted financial market access, DNB says

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Oil firms facing restricted financial market access, DNB says

Sentimentin the North Sea oil sector worsened in the first quarter, Norway's largestbank said as it reported sharply higher impairment losses for the period.

Speakingon a conference call to discuss DNB ASA's earnings, CFO Bjørn Erik Næss said conversations withclients made it "quite clear" that sentiment had deterioratedsomewhat amid concerns about the low oil price, and that firms in the oil andgas and offshore industries are finding their access to financial marketsrestricted.

Theprice of Brent crude dropped below $30 per barrel in January and ended thefirst quarter under $40. As of April 28, it had recovered to above $47.

"We'vegone through a quarter with an average lower oil price, so that obviously hasan effect on group impairments," Næss said. The bank, Norway's largest byassets, recorded an increase in first-quarter impairment of loans andguarantees to 1.17 billion kroner, from 575 million kroner a year earlier.Within the large corporate and international customers segment, impairmentlosses totaled 1.36 billion kroner, up from 312 million kroner a year earlier,partly because of exposure to oil-related industries.

First-quarterprofit amounted to 5.22 billion kroner, down from 6.54 billion kroner in thefirst quarter of 2015.

Inthe shipping, offshore and logistics division, individual impairments increasedto 610 million kroner, from 382 million kroner in the fourth quarter of 2015and 242 million kroner a year ago. In the energy division, impairments totaled81 million kroner, compared to 173 million kroner in the prior quarter and 12million kroner a year ago. Accumulated collective and individual impairmentlosses for the oil-related portfolio total about 2.1 billion kroner, equatingto 2.5% of total loans.

TheCFO said this was offset somewhat by the retail business, where asset qualityis still "very stable." Among small and medium-sized enterprisecustomers, loan losses are concentrated on "a handful" of names andthe bank is not seeing any big negative developments.

"Wesee that there [is] some increase in risk [in SMEs] in the oil-heavy regions,but that is more than balanced by decreased risk in the central part ofNorway," he said.

Thebank expects impairment losses of up to 6 billion kroner for 2016, compared to2.27 billion kroner in 2015, followed by another 6 billion kroner in 2017 andthen an improvement in 2018.

Næssexplained that, when calculating future projections, the bank prioritizes investmentlevels in the oil sector over the actual oil price. Because of a lag, it isdifficult for DNB to make a connection between the oil price and impairments.

"Theoil price could go up to $80 tomorrow and nothing would happen to the activitylevel, or the price could stay at $60 for three years and activity would startagain," he said. "We are much more dependent on the activity level inthe North Sea; it's better for us to track the investment level."

CEORune Bjerke said Norway's oil industry would continue to perform well based ontoday's oil price, and he stressed that offshore activity on the continentalshelf is "solid." He said the bank expects to see more investments inthe industry in the coming quarters, but he warned that this would continue ata lower level than that experienced between 2010 and 2014. He added that thedecrease in investment already seen "will lead to challenges for the rigindustry."

Theexecutives also spoke of subdued activity in the shipping sector. Bulkshipping, which involves ships designed to transport unpackaged cargo such ascoal, is struggling with reduced demand because of the slowdown in China, aswell as a significant increase in the supply side. Næss said DNB has seen somehigher rates in the bulk segment, but that they are not at a sustainable levelwhere they can cover expenses.

"Weare carefully optimistic when it comes to bulk, but it will take some time tobalance," he said.

Inthe container segment, the CFO said new ships were creating an imbalance.

"Wesee that the prices in the market are going down, but not at the level where weare overly concerned at the moment."

As of April 27, US$1 wasequivalent to 8.18 Norwegian kroner