| FLNG and commercial ships bode well for SHI |
| Even as drillship orders are drying up, orders for floating LNG (FLNG) vessels and commercial ships would augur well for Samsung Heavy Industries (SHI), analysts believe. The second-biggest shipbuilder in South Korea on 28 April posted a KRW11.6 billion (USD10.78 million) profit for the first quarter of 2015, reversing a KRW272.4 billion loss for the first quarter of 2014. Still, the result was far below the KRW89 billion profit that South Korean securities firms predicted. Samsung Securities analyst Han Young-soo attributed the lower-than-expected result to heavy fixed-cost burdens amid sluggish sales; product mix deterioration after drillship sales contracted; and the recognition of one-off KRW30 billion design costs related to the Egina FPSO project. Also on 28 April, SHI announced that Greece-based Ocean Rig has requested to defer delivery of two drillships from 2017 to 2019. The plunge in oil prices has hit demand for drillships and other offshore vessels as oil companies are slashing capital expenditure. Han said, "The delayed drillship deliveries will likely prompt additional cuts to 2015–16 sales and operating profit forecasts on the firm." True Friend Korea Investment & Securities analysts Lee Kyung-ja and Ahn Hyung-jun said in their commentary that SHI would have to compete harder for commercial ship orders now that the momentum has swung away from drillships. SHI's edge in FLNG vessels works in its favour, Lee and Ahn noted. SHI is already building Prelude FLNG for Shell and Rotan FLNG for Petronas. Lee and Ahn said, "SHI is preparing to bid on the hull side of the Australian Browse FLNG [USD4 billion for three ships], and the contract may be signed as early as [in the second quarter of] 2015. The residual topside contract is expected in 2016, and the value should reach USD9 billion. Shell is also implementing its next FLNG project exclusively with SHI. As such, we believe SHI is at a different starting point than [its] peers." They believe SHI would not face difficulties in hitting its USD5 billion order win target for commercial ships with investors heightening their interest in oil tankers. However, SHI would be expected to build just 13 drillshps this year, compared with the previous annual average of 20 drillships in the early 2010s. Even so, Han is cautious about SHI's overall earnings prospects as drillship orders are unlikely to be bullish. He thus urged caution with SHI's stock, which he thinks could dip to KRW19,000 in the next six months, compared with the current price of KRW19,650. |