Valaris bankruptcy unnerves DSME, Samsung Heavy

Daewoo Shipbuilding & Marine Engineering (DSME) and Samsung Heavy Industries are alarmed by a series of bankruptcies of global energy firms, which could lead to cancellation of drillship contracts and litigations, according to analysts, Friday.

The latest case was the Valaris bankruptcy filed in Houston, Aug. 19. If the U.S. Bankruptcy Court approves the bankruptcy, the world’s largest offshore drilling contractor will be able to continue its operation and undergo financial restructuring to reduce its debt.

Created via a merger of Ensco and Rowan in 2019, the offshore drilling company made the decision because COVID-19 caused a drop in oil prices and a decline in demand for its services. Although drilling costs around $60 to $70 per barrel, international oil prices have remained below $50 per barrel for the past few months after a significant price plunge following the spread of the virus.

The situation is similar for other global drilling contractors. Whiting Petroleum, Chesapeake Energy, Diamond Offshore and Noble Corporation also filed for bankruptcies recently.

This could weigh on Korean shipbuilders, which have built drillships for those energy firms. According to officials, some drilling companies have declined to receive drillships from the shipbuilders by delaying their work intentionally or canceling contracts.

Data compiled by Clarksons Research, a market researcher for the shipbuilding industry, showed that 19 drillships were supposed to be built globally. DSME and Samsung Heavy are supposed to build five drillships each.

Among the five orders of DMSE, two were from Valaris, so its recent bankruptcy has caused concerns that it may refuse to receive those ships from the Korean shipbuilder.

DSME has already resold its two drillships ordered by Seadrill to Northern Drilling. As for the remaining one, the shipbuilder has yet to find a buyer after the cancellation of its contract with Vantage Drilling.

DSME has claimed it would not suffer a significant loss from the possible cancellation of its contract with Valaris, saying the drilling firm has already completed 70 percent of the payment for its orders. DSME posted a 73.4 billion won ($62 million) operating profit during the second quarter, down 62.3 percent from a year earlier.

Given that the negative events came amid deteriorating market conditions, analysts here are skeptical about the outlook for DSME.

“It is true that DSME showed a better performance than its rivals throughout the first half of this year, but there is insufficient reason to offer additional premiums to the company’s valuation, compared to its rivals,” Samsung Securities analyst Han Young-soo said. “It is still uncertain whether its drillship-related loss, which was reflected in its second-quarter earnings, is just a one-time event.”

The situation is worse for Samsung Heavy, because all contracts on its drillship orders were canceled. The shipbuilder, which is in legal battles with foreign buyers, has spent several billion won to maintain its offshore plant facilities in the dock. In addition, the valuation of its inventory drillship has continued to fall.

During the second quarter, Samsung Heavy suffered a shock 707.7 billion won operating loss, far worse than the market consensus of 19 billion won. Samsung Heavy has reported operating losses for the 11th straight quarter since the fourth quarter of 2017. According to the company, drillship-related losses accounted for 60 percent of its second-quarter losses.

“Due to the change in market conditions, the valuation of our drillships dropped 20 percent to $1.27 billion from $1.59 billion,” the company official said. “Considering the exchange loss, the total amount of loss related to drillships is 454 billion won.”

After the earnings shock, local brokerages have downgraded the company and lowered target prices. Although more than 88 percent of domestic securities firms had recommended a “buy” position for Samsung Heavy in January, the percentage of local brokerages being “neutral” about the company rose to 76.47 percent this month.

“The company holding its unsold drillship longer than expected is a risk factor,” Shinyoung Securities analyst Eom Kyung-ah said. “Samsung Heavy is expected to suffer an annual loss again this year.”

Analysts fear that the repeated bankruptcies of global energy firms will aggravate the situation of Korean shipbuilders. The analysts said the shipbuilders needed to find alternative buyers as soon as possible to help their recovery.
Source: Korea Times