Oil-related portfolio update by Berit L. Henriksen Global head of - - PowerPoint PPT Presentation

New York, 27 February 2015

DNB Group: Oil-related portfolio update

by

Berit L. Henriksen Global head of Energy

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DNB Markets’: Long Term Oil Price Forecast

Stabilising at $65/bbl for 2015 and $80/bbl for 2016, $90/bbl long term

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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 99.5 99.5 Forecast Forecast Nominal $/b Real (2015) $/b Q1-15 55 55 Q2-15 63 63 Q3-15 69 69 Q4-15 74 74 2015 65 65 2016 80 79 2017 84 81 2018 88 84 2019 90 84 2020 90 82 20 40 60 80 100 120 140 160 1995 1998 2001 2004 2007 2010 2013 2016 2019 $/b

Spot Brent History & FWD looking

FWD (nominal) Forecast nominal Historical Forecast real (2014 USD)

Forecast by DNB Markets. (The forecast is for the average of the rolling 1st month ICE Brent future contract)

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

Other corporate 43% Oil & Gas 3.9% Offshore 2.8% Oilfield services 1.8% Households 48%

DNB has a well diversified oil-related portfolio

• 8% of total Group EaD to oil related portfolios

4 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, LNG: Liquid Natural Gas

Total DNB Group loan exposures EaD of NOK 1909n as of 31 Dec 14

In per cent of total

Total oil-related portfolios EaD of NOK161bn as of 31 Dec 14 (FX adj NOK144bn)

In per cent of NOK 161bn

Oil & Gas, Offshore and Oilfield Services – An overview

DNB Group as of 31 Dec 2014 Oil & Gas Offshore Oilfield Services Total portfolio, EaD, NOK billion 74 53 33 Total portfolio, drawn amount, NOK billion 31 31 11 Average grade* 3.5 4.9 4.7 Expected loss 0.07% 0.19% 0.15% Number of client groups 85 63 75 Number of employees in sector 24 23 17

• No. of clients in grade 8-10 (PD > 3%)

3 4 2 EaD of clients in grade 8-10, NOK billion 0.2 0.3 0.3 10 largest client groups in % of total segment 36% 42% 51% 20 largest client groups in % of total segment 56% 64% 74%

5 * 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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No negative migration by year-end 2014

• 65% of portfolio is low risk and 33% is medium risk

7 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.

DNB’s oil-related portfolio split by sub-segment in exposure (EaD) and by risk grade NOK 161bn (FX adj. NOK 144bn) as of 31 Dec 2014 (and NOK 144bn as of 30 Sep 2014)

NOK billion 54 64 14 10 0.20 0.20 0.00 0.00 17 18 29 33 1.47 0.31 0.00 1.17 19 23 8 10 0.61 0.30 0.20 0.30 20 40 60 80 100 120 Sep-14 Dec-14 Sep-14 Dec-14 Sep-14 Dec-14 Sep-14 Dec-14 Grade 1-4 "Low risk" Grade 5-7 "Medium" Grade 8-10 "High" Grade 11-12 "Doubtful & NPL"

Oilfield Services Offshore Oil & Gas

Outstanding loans to oil, offshore and oil service are 46% of EaD

• Large part of remaining exposure is guarantees and revolving facilities to IG

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DNB’s oil-related portfolio: Drawn loans split by sub-segment and risk grade, total exposure by risk grade (EaD) NOK 74bn (FX adj. NOK 65bn) and exposure (EaD) NOK 161bn (FX adj. NOK 144bn) as of 31 Dec 2014

NOK billion 19 25 6 6 0.14 0.20 0.00 0.00 6 9 19 21 1.45 0.31 0.00 1.17 4 4 6 7 0.47 0.20 0.19 0.20 91 105 51 53 2.28 0.81 0.20 1.47 20 40 60 80 100 120 Sep-14 Dec-14 Sep-14 Dec-14 Sep-14 Dec-14 Sep-14 Dec-14 Grade 1-4 "Low risk" Grade 5-7 "Medium" Grade 8-10 "High" Grade 11-12 "Doubtful & NPL" Oilfield Services (34% drawn loans) Offshore (59% drawn loans) Oil & Gas (42% drawn loans) Exposure (EaD)

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. Doubtful & NPL = Non performing loans, IG = investment grade companies

Highly profitable portfolio

• within DNB’s Oil & Gas, Offshore and Oilfield Service sectors

9 * Oil, offshore and oilfield services units are all part of the business unit Large Corporate & International in DNB.

DNB’s oil-related portfolios - profit before impairments and tax for financial years 2011 till 2014

NOK billion

1.52 2.00 1.86 1.86 2011 2012 2013 2014

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 2014 NOK million

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Oil & Gas - It‘s a well diversified portfolio

– robust to oil price movements, 60% of lending to investment grade

11 RBL: Reserve Based Lending, IG: Investment grade, E&P: Exploration & Production, NOC: National Oil Companies, EFF: Exploration financing facilities. LNG: Liquid Natural Gas. All figures as of 31 Dec 2014. FX NOK/USD as of 31 Dec 2014: 7.39 and as of 30 Sept 2014: 6.43, hence FX adjusted volume per 31 Dec 2014 was NOK67bn, if we used 30 Sept 2014 FX rates by 31 Dec 2014. Large IG E&P / Integrated oil co's and NOCs 23.9 32% Midstream incl LNG 23.9 32% E&P midcaps 4.0 6% RBL and

• ther

structured E&P 8.4 11% Refining & pet.chem 11.0 15% EFFs 3.2 4%

• Large IG E&P/ integrated and national oil companies:

In general large, diversified companies with robust balance sheets and ample liquidity that can sustain a significant drop in oil price.

• Midstream incl. LNG:

Mainly companies with infrastructure (pipelines, terminals, etc.) assets. 58% of EaD is IG. Limited sensitivity to commodity price movements.

• Exploration & Production (E&P) mid-caps:

Typically more robust than RBL.

• Reserved based lending (RBL) :

Bank debt is based on certain assumptions (reserves/ production volumes, commodity prices, capex, etc). Well structured, i.e. “very early” covenants and collateral-based. Semi-annual re-determinations of borrowing base and revision of price decks used for lending purposes.

• Refining & Petrochemical:

Cyclical, but primarily margin based business. 51% of EaD is IG. Less sensitive to commodity price movements.

• Exploration financing facilities (EFFs):

Secured financing of tax refund (related to exploration) from the Norwegian State. No direct oil-price risk.

Oil & Gas exposure - NOK74bn (3.9% of total Group EaD)

NOK bn and per cent of NOK74bn

Offshore - solid companies and high contract coverage

• The direct risk factor is not oil price, but the activity level and day-rates

12 OSV: Offshore Service Vessels, F(P)SO: Floating (Production) Storage Offloading. All figures as of 31 Dec 2014. FX NOK/USD as of 31 Dec 2014: 7.39 and as of 30 Sept 2014: 6.43, hence FX adjusted volume per 31 Dec 2014 was NOK46bn, if we used 30 Sept 2014 FX rates by 31 Dec 2014. OSV 22.7 42.7% Rig 17.6 33.0% FPSO/FSO 5.2 9.8% Subsea construction 4.2 7.9% Other 3.5 6.6%

Offshore exposure - NOK53bn (2.8% of total Group EaD)

NOK bn and per cent of NOK53bn

• Offshore service vessels (OSV):

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:

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:

Primarily full contract coverage to strong counterparties Mainly full amortisation during contract period

• Subsea constructions:

Low short term oil price dependency, as it’s linked to approved field development projects

Oilfield Services exposure

• Mainly low risk exposure

13 IG: Investment grade, LBO: Leverage Buyouts, All figures as of 31 Dec 2014. FX NOK/USD as of 31 Dec 2014: 7.39 and as of 30 Sept 2014: 6.43, hence FX adjusted volume per 31 Dec 2014 was NOK31bn, if we used 30 Sept 2014 FX rates by 31 Dec 2014. Large-caps, investment grade companies 19.1 58% Non IG / Other mid- cap 5.3 16% Seismic 1.2 4% LBO-portfolio 7.4 22% Other 0.1 0%

• Large caps investment grade companies:

~60% of EaD in large cap, global investment grade

• companies. Primarily US based.
• Non-investment grade oilfield services/other

midcaps: Wide range of companies through the oil and gas service value chain. Medium/small caps only close to home.

• Seismic:

Limited exposure and dominant part is short-term working capital financing.

• Leveraged buyout (LBO):

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 33bn (1.8% of total Group EaD)

NOK bn and per cent of NOK33bn

Q & A

Appendix

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• The offshore and oilfield service value chain
• Macro economy forecast by DNB Markets for
• Norwegian economy
• Oil price outlook
• Economic scenarios if the oil price would stay at $50/bbl..
• DNB Grading vs external ratings

The offshore and oilfield service value chain

16 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.

Norway: Soft landing

• Consumption and non-oil exports up, as oil and housing investment pull down

17 Forecast by DNB Markets

• 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.

18 Forecast by DNB Markets. GPFG: Government Pension Fund Global (The Norwegian Petroleum Fund)

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

Norway: Shares of GDP

1995-2014, 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

Oil: Trend Line Growth Favors Supply – Not Demand

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• 2.5
• 1.5
• 0.5

0.5 1.5 2.5 3.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Million b/d

YoY Non-OPEC Supply vs Global Oil Demand

• 12 month mavg

Forecast by DNB Markets

Oil: How can anyone doubt that the market is over supplied?

• Global oil stocks (excl. Chinese strategic stocks) are building massively. This is a

function of supply being larger than demand.

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5300 5350 5400 5450 5500 5550 5600 5650 5700 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Million barrels

Global Crude & Product Stocks - JODI-data

JODI-data are adjusted for countries w ith irregular reporting - and China is added w ith Xinhua New s Agency Data

2011 2012 2013 2014

Forecast by DNB Markets

DNB Markets’: Long Term Oil Price Forecast

Stabilising at $65/bbl for 2015 and $80/bbl for 2016, $90/bbl long term

21

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 99.5 99.5 Forecast Forecast Nominal $/b Real (2015) $/b Q1-15 55 55 Q2-15 63 63 Q3-15 69 69 Q4-15 74 74 2015 65 65 2016 80 79 2017 84 81 2018 88 84 2019 90 84 2020 90 82 20 40 60 80 100 120 140 160 1995 1998 2001 2004 2007 2010 2013 2016 2019 $/b

Spot Brent History & FWD looking

FWD (nominal) Forecast nominal Historical Forecast real (2014 USD)

Forecast by DNB Markets. (The forecast is for the average of the rolling 1st month ICE Brent future contract)

What if the oil price would stay a $50/bbl? (i)

• Scenarios by DNB Markets’ economists

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Oil price development

USD per barrel. Main assumptions and a downside $50/bbl.-scenario by DNB Markets

Oil investments in Norway

2013 prices, NOK billion. Main assumptions and a downside $50/bbl.-scenario by DNB Markets

112 47

65 80 90 50

1995 1999 2003 2007 2011 2015e 2019e Oil price DNB Markets' forecast $50/bbl-scenario 98 205 155 123 1997 2000 2003 2006 2009 2012 2015e 2018e Oil investments DNB Markets' forecast $50/bbl-scenario

Source: Statistic Norway, forecast by DNB Markets

What if the oil price would stay a $50/bbl? (ii)

• Slower economic growth in Norway is expected, however exports,

private and public consumption will ensure a soft landing

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98

205 155

1997 2000 2003 2006 2009 2012 2015e 2018e

Oljeinvesteringer Prognose

98

205 155

1997 2000 2003 2006 2009 2012 2015e 2018e

Oljeinvesteringer Prognose

2.5

2.5 0.6 4.3 5.2

• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7% 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015e 2016e 2017e 2018e Mainland GDP GDP 50$/bbl-scenario Unemployment

• Unempl. $50/bbl-scen.

Mainland Norway GDP growth and unemployment

Year-on-year, per cent Main assumptions and a downside $50/bbl.-scenario by DNB Markets

Sources: Statistics Norway, Norges Bank, Forecast and scenarios by DNB Markets as of January 2015. .

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

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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