10-02-2017

Liquidity Crisis from Norway May Plague Korean Shipbuilders

Shipbuilding

The shipbuilding industry seemed to heave a sigh of relief with new shipbuilding orders earlier this year, but a resurfacing negative factor is putting the shipbuilding industry in the hot seat as the world’s fifth largest deepwater drilling contractor, Seadrill of Norway is on the brink of going under, Samsung Heavy Industries, which plans to deliver two drill ships to the company this March is pressed by the negative factor.

According to the shipbuilding industry on February 8, Seadrill is negotiating with its creditors over financial structure improvement plans such as the expansion of new capital and the extension of borrowings’ maturity periods. But little progress has been made. Some are warning about a possibility that the driller may go bankrupt.

Seadrill is a major corporate customer of Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering (DSME), and Samsung Heavy Industries, as it explores deep sea oil for global oil companies such as Exxon Mobil and BP. Shipbuilders received many deepwater drillship orders when the oil price was US$ 100 a barrel, but related companies such as Seadrill have been suffering from worsening earnings due to low prices since the latter half of 2014.

The problem is that Seadrill’s liquidity crisis may hit Korean shipbuilders. Currently, Seadrill has given orders for five drillships to Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Hyundai Samho Heavy Industries. The orders amounted to about US$ 2.7 billion. Samsung Heavy Industries, which delivers two drillships to Seadrill in March, will put to test first. Seadrill is not requesting the delivery of the ships but Samsung Heavy Industries secured a 30% advance payment in preparation for an emergency. Samsung Heavy Industries clarified its position, saying that if they fail to deliver the drillships to Seadrill, they will be able to recoup the shipbuilding cost by selling them for more than 70% of their original prices. “Seadrill will not give big effects to us as we will deliver 50 ships and receive 2 trillion won for them this year,” said an official of Samsung Heavy Industries.

Some experts in the shipbuilding industry are predicting that the sale of Seadrill will not be smooth. This is because deepwater drill contractors are having sluggish market conditions as deep-sea drilling facilities are showing a 70%-level operating rate and charter fees for them were cut in half.

DSME, which will deliver one drill rig in 2018 and 2019, respectively, is expected to wait and see the situation further. However, uncertainties will not disappear until Seadrill resolves its liquidity problem. Hyundai Samho Heavy Industries was informed of the cancellation of an order by Seadrill in September 2015 and is currently undergoing arbitration in a UK court. There will be no additional impact on Hyundai Samho Heavy Industries as the company already handled the loss in the third quarter of 2005. Hyundai Heavy Industries has relatively less burdens as the company is the only one without a backlog of drillships or semi-submersible drill units among the three major shipbuilders.

Source: Business Korea

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