Hit by Plunge in Oil Prices
The share price of Samsung Heavy Industries has been falling sharply as the outlook for its offshore plant business is bleak due to a plunge in international oil prices. Its sister company Samsung Life Insurance also sold more than half of its stake in Samsung Heavy Industries in a variable insurance fund.
Samsung Life pruned the number of its Samsung Heavy Industries shares in the variable fund from 768,530 at the beginning of March to 319,269 shares at the beginning of April.
Samsung Heavy Industries’ proportion in the variable fund is not large. However, the fact that Samsung Life sold more than half of its stake in the shipbuilder in a month means that the stock has little possibility of going up. Given that variable insurance is a long-term product, Samsung Life’s move suggests that the mid- to long-term outlook of Samsung Heavy Industries is not bright.
Samsung Heavy Industries has a higher exposure to the offshore plant business than other shipbuilders. The offshore plant business is quite subject to oil prices. The problem is that international oil prices have plummeted since March, which led to a drop in orders and the company’s share price has fallen significantly. Samsung Heavy Industries aims to win US$2.5 billion worth of offshore plant orders this year. The figure accounts for 30 percent of its overall order target of US$8.4 billion for 2020. The offshore plant order goal more than doubled from US$1.1 billion in the previous year.
Many large-scale offshore projects such as floating production storage and offloading (FPSO) facilities or gas-fired floating production units (FPUs) have been suspended or postponed indefinitely due to a plunge in oil prices. The situation in the offshore plant sector is worse, as global orders dipped from the previous year due to the novel coronavirus crisis.
In addition, Samsung Heavy Industries has suffered massive losses in the drillship sector, one of the offshore businesses. The company may have to set aside additional loss provisions. The total contract price of the five drillships it has built was US$2.99 billion, but their book value shrank to US$1.59 billion at the end of 2019.