The offshore drilling business is in such distress that Transocean just sold at a steep discount a dozen rigs it does not need to a small Norwegian group. That helps explain why Daewoo Shipbuilding and Marine Engineering is seeking a bailout from the South Korean government. It does not explain why the government should provide that bailout.
South Korean shipyards, well-regarded for their high-quality work, have long been the choice of drilling companies to build high-specification rigs for deepwater roles. That has left them dangerously exposed to the oil price. Daewoo Shipbuilding has lost money since 2013, just before the crude price plunged. It has yet to be paid fully for rig orders going back several years. The shares were suspended in July, after falling more than 90 per cent from their peak.
The South Korean state, which has troubles enough with a corruption scandal, is offering cash of Won2.9tn ($2.6bn) to the ailing company. State banks would convert their loans into equity worth another Won1.6tn.
The total proposed bailout of Won4.2tn reflects the moth-eaten state of Daewoo Shipbuilding’s order book. As of last year, deepwater rigs accounted for 39 per cent of a backlog. Regrettably, clients are refusing to pay up. Buyers have delayed settling bills for six out of seven deepwater rigs due for delivery in 2015-16. Assuming 70 per cent of the price is due at delivery, Daewoo Shipbuilding is awaiting payment on over $4bn — around the size of the rescue.
Fortunately, Daewoo Shipbuilding has other business lines. Liquefied natural gas carriers have done well for the group, which has 40 per cent of the world market, according to Nomura. Orders for these ships should triple this year to around 30. Prices have held steady over the years as new LNG projects have come on stream. The vessels make up 36 per cent of Daewoo Shipbuilding’s order book, though industry orders are running at roughly half the level of the peak in 2014.
Politicians are preparing to dip into taxpayers’ pockets to protect jobs here, as much as at the ailing rigs division. They hope to tide Daewoo Shipbuilding over until the storm passes. But the oil business will remain cyclical, so the peril will recur. Better to rejig Daewoo Shipbuilding as part of broader industrial restructuring. If the rigs unit fails along the way, public funds would be more usefully spent on retraining redundant staff.
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