DNB Group: Robust oil-related portfolio
Transcript of DNB Group: Robust oil-related portfolio
19 December 2014
DNB Group: Robust oil-related portfolio
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Agenda for 19 Dec 2014:
Oil & Gas, Offshore and Oilfields Service
Kjersti Haugland Senior macro analyst Norwegian economy
Torbjørn Kjus Senior oil analyst Oil price forecast
Trygve Young Chief Risk Officer Robust portfolio in oil-related exposure
Berit Henriksen Global Head of Energy Portfolio overview
Espen Kvilekval Head of Oil & Gas Section Oil & Gas - details
Magnus Piene Head of Offshore Section Offshore - details
Morten Kreutz Head of Oilfield Services Section Oilfield Services - details
Trygve Young &
Bjørn Erik Næss Chief Risk Officer
Chief Financial Officer Concluding remarks
Q&A
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Norway: Soft landing
3 Forecast by DNB Markets as of 16 Dec 2014
-2
-1
0
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1990 1995 2000 2005 2010
Norway: Key indicatorsPer cent
Mainl.-GDP y/y CPI, y/y Unemploym.
Source: Statistics Norway/DNB Markets
70
80
90
100
110
120
130
140
150
160
Q1 2008 Q3 2010 Q1 2013 Q3 2015 Q1 2018
Norway: Demand components2008Q1=100. 3 quarter moving average
Private cons. Public cons. Oil inv.Business inv. Housing inv. Trad. exports
Source: Thomson Datastream/DNB Markets
Norway: A robust economy Oil investments 7% of GDP. Ample fiscal leeway.
4 Forecast by DNB Markets as of 16 Dec 2014
0
20
40
60
80
100
1995 1998 2001 2004 2007 2010 2013
Norway: Shares of GDP1995-2013, per cent
Private consumption Public consumptionNon-oil investments Oil investmentsTrade surplus
Source: Statistics Norway/DNB Markets
-100
-50
0
50
100
150
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1985 1990 1995 2000 2005 2010 2015
Public Net AssetsPercent of GDP
Norway GPFG EMU OECDSource: Ministry of Finance, NB2015/DNB Markets
Updated oil price estimate – short term volatility - stabilising at 65-75$/brl for 2015 and 75-85$/brl for 2016
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-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
2004 2006 2008 2010 2012 2014
Mill
ion b
/d
Global Oil Demand Growth vs Non-OPEC Growth(12-months mavg)
Source: IEA
5300
5350
5400
5450
5500
5550
5600
5650
5700
5750
5800
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Mill
ion b
arr
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Global Crude & Product Stocks - JODI-dataJODI-data are adjusted for countries with irregular reporting - and China is added with Xinhua News Agency Data
2011 2012 2013 2014Source: JODI, DNB Markets
We are now positive to the future oil price - the oil market is now overshooting to the downside
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Historical Historical
Nominal $/b Real (2015) $/b
2001 24.4 32.2
2002 25.0 32.4
2003 28.8 36.5
2004 38.3 47.2
2005 54.5 65.0
2006 65.1 75.3
2007 72.4 81.3
2008 97.3 105.2
2009 61.7 67.0
2010 79.5 84.9
2011 111.3 115.2
2012 111.7 113.3
2013 108.7 108.7
2014 100.0 100.0
Forecast Forecast
Nominal $/b Real (2015) $/b
Q1-15 65 65
Q2-15 66 66
Q3-15 72 72
Q4-15 76 76
2015 70 70
2016 80 79
2017 85 82
2018 88 84
2019 91 85
2020 95 86
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1995 1998 2001 2004 2007 2010 2013 2016 2019
$/b
Spot Brent History & FWD looking
Possible range FWD (nominal)
Forecast nominal Historical
Forecast real (2014 USD)Source: Reuters, DNB Markets
Credit strategy for the DNB Group
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• We are a long term relationship oriented bank
• Focus on quality of management
• We have a low-risk portfolio strategy
• We finance corporate risk based on debt service ability (cash flow), not assets alone
• Exposure to non-investment grade companies is secured and followed up by covenants
• We finance industry sectors where we have institutional industry sector competence,
and we have been in the oil related industries since oil was discovered on the Norwegian
Continental Shelf
DNB has a well diversified oil-related portfolio - 8% of total Group EaD to oil related portfolios
8 EaD: Exposure at Default, IG: Investment Grade, NOCs: National Oil Companies, RBL: Reserved Based Lending, E&P: Exploration &
Production, F(P)SO: Floating (Production) Storage Offloading, LBO: Leverage Buyout, OSV: Offshore Supply Vessel
Other corporate
43%
Oil & Gas 3.7%
Offshore 2.6%
Oilfield Services
1.5% Households
49%
Downstream & petchem
6%
Midstream 10%
Upstream / integrated large-
caps and NOCs (IG) 17%
Upstream mid-caps (sub IG)
4%
RBL and other structured E&P
6%
Exploration Financing Facilities
2% Other Oil & Gas
2%
OSV 16%
Rig 11%
FPSO/FSO 3%
Subsea construction 3%
Other Offshore 1%
Large-caps, IG companies
11%
LBO-portfolio 5%
Seismic 1%
Other Oilfield services
2%
Total DNB Group
EaD of NOK 1834bn as of 30 Sep 14 In per cent of total
Total oil-related portfolios
EaD of NOK 144bn as of 30 Sep 14 In per cent of NOK 144bn
Oil & Gas, Offshore and Oilfield Services – An overview
DNB Group as of 30 Sept 2014 Oil & Gas Offshore
Oilfield
Services
Total portfolio, EaD, NOK billion 68 48 28
Total portfolio, drawn amount, NOK billion 25 26 11
Average grade* 3.8 4.9 4.8
Expected loss 0.08% 0.19% 0.16%
Number of client groups 85 55 75
Number of employees in sector 24 23 17
No. of clients in grade 8-10 (PD > 3%) 2 4 3
EaD of clients in grade 8-10, NOK billion 0.2 1.5 0.6
10 largest client groups in % of total segment 31% 44% 43%
20 largest client groups in % of total segment 47% 65% 64%
9 * DNB’s risk grade system: 1 represents the lowest risk and 10 the highest risk. EaD: Exposure at default, PD: Probability of default
Proactively handling the uncertainty & market turbulence
• Monitoring of our portfolio is given top priority in the current situation with oil price
turbulence
• We have reviewed our oil, gas, offshore and oilfield service portfolios
• We actively manage our credits/clients
• Those who are performing, but not in accordance with their business plans require
additional attention, and are placed on (the so-called) «Watch-list»,
it’s our early warning tool!
• Watch-listed companies are reviewed quarterly, as a minimum
• We allocate additional expertise and resources to clients and
sub-portfolios with higher risk
• We are continuously evaluating which clients to put on “Watch-list”,
and what actions to be taken
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63% of our portfolio is low-risk and 35% is medium risk
11 EaD: Exposure at Default, PD: Probability of default. Risk grade system, please see back up slide for details.
DNB's risk classification system, where 1 represents the lowest risk and 10 the highest risk. All figures as of 30 Sept 2014.
DNB’s oil-related portfolio split by sub-segment in exposure (EaD) NOK 144bn as of 30 Sep 2014 NOK billion
54
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0.20 0.00
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1.47 0.00
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0.61 0.20
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Grade 1-4 "Low risk" Grade 5-7 "Medium" Grade 8-10 "High" Grade 11-12 "Doubtful & NPL"
Oilfield Services (Avg.grade 4.8)
Offshore (Avg.grade 4.9)
Oil & Gas (Avg.grade 3.9)
Outstanding loans to oil, offshore and oil service are 43% of EaD - Large part of remaining exposure is guarantees and back-stops to investment grade
12 EaD: Exposure at Default, PD: Probability of default. Risk grade system, please see back up slide for details.
DNB's risk classification system, where 1 represents the lowest risk and 10 the highest risk. All figures as of 30 Sept 2014.
Drawn loans NOK 62bn, Exposure (EaD) NOK 144bn as of 30 Sep 2014 by sub-segments NOK billion
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Grade 1-4 "Low risk" Grade 5-7 "Medium" Grade 8-10 "High" Grade 11-12 "Doubtful & NPL"
Oilfield Services (38% drawn loans)
Offshore (56% drawn loans)
Oil & Gas (37% drawn loans)
Exposure (EaD)
Highly profitable portfolio - within DNB’s Oil & Gas, Offshore and Oilfield Service sectors
13 * Oil, offshore and oilfield services units are all part of the business unit Large Corporate & International
1.52
2.00
1.86
1.31
2011 2012 2013 9M 2014
DNB’s oil-related portfolios - profit before tax and impairments from 2011 till 30 Sep 2014 NOK billion
Historical low impairments in absolute levels - Oil & Gas, Offshore and Oilfield Services sectors
159 155 108 126 132
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200
400
600
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1400
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1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9M14
NOK million
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Oil & Gas - It‘s a well diversified portfolio – robust to oil price movements
15 RBL: Reserve Based Lending, IG: Investment grade, E&P: Exploration & Production, NOC: National Oil Companies,
EFF: Exploration financing facilities. All figures as of 30 Sept 2014
Large IG E&P /
Integrated oil co's and NOCs 26.2
Midstream 15.3
E&P midcaps
4.9
RBL and other
structured E&P 8.6
Refining & pet.chem
9 EFFs 3.6
Other 0.7
• Large IG E&P/ integrated and national oil companies: (Grade 2.1).
In general large, diversified companies with robust balance sheets and
ample liquidity that can sustain a significant drop in oil price.
• Midstream: (Grade 3.2)
Mainly companies with infrastructure (pipelines, etc.) assets. 69% of
EaD is IG. Limited sensitivity to commodity price movements.
• Exploration & Production (E&P) mid-caps: (Grade 3.9)
Typically more robust than RBL.
• Reserved based lending (RBL) / other struct. E&P: (Grade 4.3)
Bank debt is based on certain assumptions (reserves/ production
volumes, commodity prices, capex, etc). Well structured, i.e. “very early”
covenants and collateral-based. For RBLs, semi-annual re-
determinations of borrowing base. As to price decks used for RBL:
1) Price decks used for debt sizing purposes never been higher than
low to mid $70ies. 2) In our credit analysis we run sensitivity cases at
oil prices below $60/bbl, and we run a 1 year liquidity test at $35/bbl.
• Refining & Petrochemical: (Grade 4.9)
Primarily margin based business. 47% of EaD is IG. Less sensitive to
commodity price movements.
• Exploration financing facilities (EFFs): (Grade 5.4)
Secured financing of tax refund (related to exploration) from
the Norwegian State. No direct oil-price risk.
Oil & Gas exposure - NOK 68bn (4% of total Group EaD)
Average grade 3.8, NOK 41bn (60%) to investment grade NOK billion
Oil & Gas: 10 largest exposures - 29% of Oil & Gas’ exposure (EaD)
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Largest 10 companies in Oil & Gas sector
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* Has been syndicated in Q4 2014. EaD: Exposure at Default, PD: Probability of default. Risk grade system, please see back up slide
for details. DNB's risk classification system, where 1 represents the lowest risk and 10 the highest risk. All figures as of 30 Sept 2014
Offshore - solid companies and high contract coverage - The direct risk factor is not oil price, but the activity level and day-rates
17 OSV: Offshore Service Vessels, F(P)SO: Floating (Production) Storage Offloading. All figures as of 30 Sept 2014
OSV 22.6
Rig 15.2
FPSO/FSO 4.1
Subsea construction
3.7 Other
2.1
Offshore exposure - NOK 48bn (3% of total Group EaD)
Average grade: 4.8 NOK billion
• Offshore service vessels (OSV): (Grade 5.6)
Mainly corporates with modern fleets (6-8 years) and good
contract coverage (60% for 2015)
Substantial part of the fleet supports existing infrastructure
as well as activities related to inspection, maintenance &
repair (IRM)
• Rig: (Grade 4.0)
More than 40% of EaD are either investment grade (IG)
companies or have full contract coverage. Primarily latest
generation rigs. 75% weighted average contract coverage
for 2015 (61% for 2016 and 43% for 2017).
• FPSO/FSO: (Grade 4.3)
Primarily full contract coverage to strong counterparties
Mainly full amortisation during contract period
• Subsea constructions: (Grade 3.9)
Low short term oil price dependency, as it’s linked to
approved field development projects
Offshore: 10 largest exposures - 44% of Offshore’s exposure (EaD)
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Largest 10 companies in Offshore sector
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EaD: Exposure at Default, PD: Probability of default. Risk grade system, please see back up slide for details.
DNB's risk classification system, where 1 represents the lowest risk and 10 the highest risk. All figures as of 30 Sept 2014
Oilfield Services exposure - Mainly low risk exposure
19 IG: Investment grade, All figures as of 30 Sept 2014
Large-caps, investment
grade companies
16.3
Non IG / Other mid-
cap 2.7
Seismic 1.0
LBO-portfolio 7.5
Other 0.6
• Large caps investment grade companies: (Grade 2.8)
~60% of EaD in large cap, global investment grade
companies. Primarily US based.
• Non-investment grade oilfield services/other
midcaps: (Grade 4.8)
Wide range of companies through the oil and gas service
value chain. Medium/small caps only close to home.
• Seismic: (Grade 5.8)
Limited exposure – EaD of NOK 1bn
Dominant part is short-term working capital financing.
• Leveraged buyout (LBO): (Grade 6.0)
EaD of NOK 7.5bn mainly related to development and
production. LBO financing only close to home. Careful
selection of sponsors in the LBO space. Acceptance of
higher financial risk only if coupled with low operational
risk. Prefer clients with less dependence on oil companies’
CAPEX budgets.
Oilfield Services - NOK 28bn (1% of total Group EaD)
Average grade 4.8 NOK billion
Oilfield Services: 10 largest exposures - 43% of Oilfield Services’ exposure (EaD)
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Largest 10 companies in Oilfield services
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EaD: Exposure at Default, PD: Probability of default. Risk grade system, please see back up slide for details.
DNB's risk classification system, where 1 represents the lowest risk and 10 the highest risk. All figures as of 30 Sept 2014
DNB’s impairment is expected to stay below normalised levels in 2015
Oil-related:
• We have a strong portfolio going into this situation
• Institutional competence
• Experience and resources allocated to handle the situation
DNB Group:
• For 2014 we reiterate earlier guidance for the DNB Group of below NOK 2bn
21 Normalised levels are around ~20 bps of EaD ~ NOK 4bn
* MTM: mark-to-market 22
Currency
effects
NOK/USD
NOK/EUR + 15%
45 bps +
NOK/USD
NOK/EUR ÷ 15%
÷ 45 bps
+ NOK 1bn MTM* effect
÷ NOK 1bn MTM* effect
+ 4 bps
÷
Basis
swaps
4 bps
Factors affecting the CET1 ratio 2016 effect, bps
CET1 ratio is sensitive to currency fluctuations – other external factors have less impact
Q & A
Appendix
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• DNB Grading vs external ratings
• The offshore and oilfield service value chain
DNB Grading vs external ratings
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DNB Grade Pd S&P Moody's
1.a 0,015 % Investment grade AAA - AA+ Aaa - Aa1
1.b 0,035 % ↓ AA - AA- Aa2 - Aa3
1.c 0,050 % ↓ A+ A1
1.d 0,070 % ↓ A A2
1.e 0,090 % ↓ A- A3
2.a 0,130 % ↓ BBB+ Baa1
2.b 0,220 % ↓ BBB Baa2
3 0,390 % ↓ BBB- Baa3
4 0,670 % ↓ BB+ Ba1
5 1,170 % High yield BB Ba2
6 1,630 % ↓
7 2,030 % ↓ BB- Ba3
8 3,510 % ↓ B+ B1
9 6,080 % ↓ B B2
10.a 10,540 % ↓ B- B3
10.b 18,270 % ↓ CCC+ Caa1
10.C 25,000 % ↓ CCC og lavere Caa2 og lavere
10.D 40,000 % ↓
11 Doubtful
12 Non-performing
The offshore and oilfield service value chain
26 AHTS: Anchor Handling Tug Supply, PSV: Platform Supply Vessel, MMO: Maintenance and modifications, MPU: Multi Purpose Unit
Indication of operational volatility Low High
Exploration Field development
Operation Decommissioning
Seismic
Exploration drilling
Appraisal drilling
AHTS + PSV
Engineering
Construction
Installation Heavy lift, subsea
Production drilling
MMO
PSV, AHTS
MPU
Engineering
Construction, heavy lift
Higher risk: Marginal fields, frontier areas
Lower risk: Large fields, benign areas
Activities within the early
phase of value chain are
the first to be cut in a time
of low oil prices.
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The statements contained in this presentation may include forward-looking statements such as statements of future
expectations. These statements are based on the management’s current views and assumptions and involve both
known and unknown risks and uncertainties.
Although DNB believes that the expectations reflected in any such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove to have been correct.
Actual results, performance or events may differ materially from those set out or implied in the forward-looking
statements. Important factors that may cause such a difference include, but are not limited to: (i) general economic
conditions, (ii) performance of financial markets, including market volatility and liquidity (iii) the extent of credit
defaults, (iv) interest rate levels, (v) currency exchange rates, (vi) changes in the competitive climate, (vii) changes in
laws and regulations, (viii) changes in the policies of central banks and/ or foreign governments, or supra-national
entities.
DNB assumes no obligation to update any forward-looking statement.
DISCLAIMER
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS