DNB Group: Robust oil-related portfolio 19 December 2014 1 - - PowerPoint PPT Presentation

19 December 2014

DNB Group: Robust oil-related portfolio

1

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

2

Norway: Soft landing

3 Forecast by DNB Markets as of 16 Dec 2014

• 2
• 1

1 2 3 4 5 6 7 1990 1995 2000 2005 2010

Norway: Key indicators

Per 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 components

2008Q1=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

20 40 60 80 100 1995 1998 2001 2004 2007 2010 2013

Norway: Shares of GDP

1995-2013, per cent Private consumption Public consumption Non-oil investments Oil investments Trade surplus

Source: Statistics Norway/DNB Markets

• 100
• 50

50 100 150 200 250 1985 1990 1995 2000 2005 2010 2015

Public Net Assets

Percent of GDP Norway GPFG EMU OECD

Source: 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

5

• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 2004 2006 2008 2010 2012 2014 Million b/d

Global Oil Demand Growth vs Non-OPEC Growth (12-months mavg)

Global Crude & Product Stocks - JODI-data

We are now positive to the future oil price

• the oil market is now overshooting to the downside

6 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 20 40 60 80 100 120 140 160 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)

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%

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

10

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 14 0.20 0.00 17 29 1.47 0.00 19 8 0.61 0.20 10 20 30 40 50 60 70 80 90 100 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 19 6 0.14 0.00 6 19 1.45 0.00 4 6 0.47 0.19 10 20 30 40 50 60 70 80 90 100 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

200 400 600 800 1000 1200 1400 1600 1800 2000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9M14 NOK million

14

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

• ther

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

• il 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)

2 4 6 8 10 12 2 4 6 8 10 12 1 2 3 4 5 6 7 8 9 10 DNB risk classes NOK billion Largest 10 companies in Oil & Gas sector

*

16 * 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)

2 4 6 8 10 12 2 4 6 8 10 12 1 2 3 4 5 6 7 8 9 10 DNB risk classes NOK billion Largest 10 companies in Offshore sector

18 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)

2 4 6 8 10 12 2 4 6 8 10 12 1 2 3 4 5 6 7 8 9 10 DNB risk classes NOK billion Largest 10 companies in Oilfield services

20 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

• f 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