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Samsung Heavy Industries Facing Bumpy Road in Offshore Plant Sector
Due to Plunging Oil Prices and COVID-19 Crisis
Samsung Heavy Industries Facing Bumpy Road in Offshore Plant Sector
  • By Michael Herh
  • April 2, 2020, 11:03
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Samsung Heavy Industries aims to attain 30 percent of its sales in the offshore plant business this year. However, it appears to be a tough goal in light of the drop in international oil prices and the ongoing COVID-19 crisis.

Samsung Heavy Industries posted an annual deficit of 1.3 trillion won in 2019 due to large-scale valuation losses in the drillship business, which belongs to the offshore plant business.

The company set its order target for 2020 to US$8.4 billion, up 18.3 percent (US$1.3 billion) from the previous year, in anticipation of the recovery of the offshore plant market. Its goal in the carrier sector is US$5.9 billion, similar to the previous year (US$6 billion), but its goal of US$2.5 billion for the offshore sector is more than double the 2019 target (US$1.1 billion).

However, international oil prices plunged due to a hegemonic war between Saudi Arabia and Russia and the new coronavirus outbreak. International oil prices have fallen to US$20 per barrel, one third compared to early 2020.

Industry watchers believe that a plunge in oil prices will hit the offshore sector hardest. In fact, many large global projects such as floating production, storage and offloading (FPSO) facilities and floating production units (FPUs) have been suspended or postponed indefinitely.

Samsung Heavy Industries has already suffered massive losses in the drillship division, one of its offshore businesses. The contract price of the five drillships it has built stood at US$2.9 billion, but at the end of in 2019, their book value shrank nearly 50 percent to US$1.5 billion.

The drillships are currently classified as assets in stock and the best scenario for the company is to sell them off.

However, due to the plunge in oil prices, their sales have become more difficult, and in some cases, their valuation losses may further expand. Samsung Heavy Industries had set aside large provisions for the drillships in 2019, but it may have to set aside more provisions if the low oil price trend holds in the long term.

Samsung Heavy Industries took out long-term loans worth 700 billion won against its drillships at the beginning of 2020, but if its profit structure does not improve fundamentally, its burden will inflate. If oil prices do not rebound, the company will have a long way to go to make a turnaround.